Study on retirement savings accounts: What Germany can learn from other countries when it comes to private pension plans

In a study, Deutsches Aktieninstitut and Deutsche WertpapierService Bank AG present recommendations for a state-subsidised retirement savings account based on an international comparison between countries. Such a custody account enables broad sections of the population to set up a profitable retirement plan. In addition to tax incentives and a waiver of contribution or interest guarantees, easy-to-understand investment products and high equity ratios are key factors for success in the countries analysed.

Last year, a focus group set up by the German government on private pension plans proposed the introduction of a state-subsidised retirement savings account. These types of pension accounts have already been introduced in various countries. By analysing corresponding models in Australia, France, Ireland, Canada and the USA, we derived five key recommendations for German legislators, which are set out in our study "Retirement savings accounts – an international comparison of successful retirement savings models ".

"Equities generate high and stable returns long term. They are therefore an ideal instrument for retirement planning. This is widely recognised abroad. Other countries therefore place much greater emphasis on equities in all three pillars of retirement planning. This would also be a good approach for Germany," emphasises Dr. Christine Bortenlänger, Chief Executive and Member of the Board of Deutsches Aktieninstitut. "The study we are presenting today focuses on the third pillar, private pension plans. We should take inspiration from positive experiences abroad to introduce retirement savings accounts in Germany, so that more citizens can save for their retirement with an attractive equity investment subsidised by the state," says Bortenlänger.

Dr. Heiko Beck, CEO of Deutsche WertpapierService Bank AG, emphasises: "The study demonstrates clearly how other countries are successfully using the attractive returns of equity investments for private pension plans. A retirement savings account with a high proportion of equities, tax incentives and no contribution or interest guarantees is an excellent way to make private pension plans more attractive and profitable than before for broad sections of the population. We need to make this type of pension scheme simple, flexible and as free from bureaucracy as possible. Saving in securities is a successful model abroad that we should definitely utilise for retirement plans in Germany."

Overview of Recommendations

Five recommendations can be drawn from the comparison as to how other countries organise retirement provision portfolios:

• Facilitate equity investment – waive premium and interest rate guarantees: A prerequisite for high equity ratios is a waiver of legally prescribed guarantees or minimum interest rates. For investment periods of 20 or 30 years, which are typical for retirement plans, such guarantees are superfluous. They cost unnecessary returns because they force providers to invest in lower-yielding, fixed-interest securities such as government bonds instead of equities.
• Enable a broad range of retirement savings accounts without bureaucracy: Unbureaucratic market access for many private providers guarantees functioning competition between providers. As the providers of retirement savings accounts are generally highly regulated financial institutions such as banks, insurance companies or capital management companies, no further regulation is required specifically for the provision of retirement savings accounts.
• Offer standard products and enable customised composition: Easy-to-understand investment products are needed to make opening a retirement savings account as simple as possible. Savers who want to customise their retirement savings accounts should be given the opportunity to do so.
• Make tax incentives more attractive: Sufficient tax incentives are an important success factor. We are therefore in favour of increasing the tax deductibility of pension contributions to 6,000 euros.
• Ensure flexibility in the payout phase: With flexible payout plans, part of the pension provision remains invested in shares throughout the retirement phase and thus continues to generate attractive returns. The flexibility of being able to choose a payout plan without a mandatory annuity is therefore also desirable in Germany.

You can find the full study " Retirement savings accounts – an international comparison of successful retirement savings models " here.