Close vote dims hope for German pension reforms

By James Paul

The closest election result in recent history has left Germany's pensions and other wider economic reforms in the balance, according to observers within the country's financial services industry.

"It's unsatisfying. We've called for pensions and other reforms, and developed channels of dialogue. But it's unclear now how we move forward," said Andreas Fink, spokesman for the Bundesverband Investment und Asset Management, Frankfurt, an organization representing the country's fund management industry.

In the Sept. 18 vote, the incumbent Social Democrat Party led by Chancellor Gerhard Schr%F6;der received 34.3% of the vote, narrowly behind the Christian Democrat Party, with 35.2%, forcing both into coalition talks with small parties.

According to Dietrich Brauninger, economist at Deutsche Bank, Frankfurt, no matter which groups make up the government, pension reforms are unlikely to take a high priority. "Whichever parties are involved, we will not have a particularly stable government," he said. "It will only be able to tackle the most urgent of problems." The DAX index of leading German stocks fell 2% after the election, with insurance companies — the likely beneficiaries of a more privately oriented pensions policy — leading the decline.

The election campaign had been played out against a crisis within the state pension scheme as it was forced to request a loan for the first time in 20 years. Mr. Brauninger said the dire financial state of the statutory pension means it will be impossible to finance increases in pensions for years to come — in the long term the state pension will scarcely provide more than a safety net. Relative to many other European countries, voluntary pensions saving is still underdeveloped in Germany, with just 4.4 million people signing up for the recently established tax-incentive-backed Riester and R%FC;rup private pension plans an acceptance rate of less than 15%. The private plans are individual saving vehicles available from banks, fund companies and insurers, and contributions also tend to be low. "The scope for making contributions to private pensions is regarded as too restrictive," said Mr. Brauninger. "The incentives for investing in private pensions have to be revised and reconsidered."

The BVI's Mr. Fink agreed. Private coverage isn't extensive enough he said: "Private pensions need a push."

But Mr. Brauninger believes the Social Democrats think they have done enough to solve the problem. Both he and Mr. Fink believe a coalition between the Christian Democrats and the Free Democratic Party would offer more to pension reform efforts. "We are sure that the (Social Democrats) are aware that there needs to be reform within the pension industry," said Mr. Fink. "But looking at the party manifestos, we expect a coalition between (Christian Democrats and Free Democrats) to offer the more substantial reforms now.

"The (Free Democratic Party) has adopted the idea of personal accounts in its program," he said. "We've also had meetings with representatives from the (Christian Democrats) on the subject. We have the impression that a (Christian Democrat/Free Democrat) coalition would be sympathetic to the idea." Mr. Brauninger agreed. "We would expect a (Christian Democrat/Free Democrat) coalition to do more in pursuit of a long-term answer," he said. Christian Democrat shadow Finance Minister Paul Kirchoff had at one point during the campaign proposed an almost complete switch to private pension coverage, but that view proved a step too far within his own party, and he has since resigned.

Whether or not personal accounts get an eventual go-ahead, others within the industry are confident that some vital measures at least will be ushered through during the next parliament. Raimund Rhiel, chief actuary at Mercer HR, Munich, believes three changes at least are inevitable during the next parliament; the state pension paid to individuals will be reduced still further; greater tax incentives will be introduced for private investment; and company-sponsored plans will be offered the possibility of dropping current obligatory minimum capital return guarantees, allowing them more freedom with investments. "Small and medium-size companies are desperate for a proper defined contribution scheme," he said. "As long as the unions can be brought onside, there is no reason it shouldn't happen."

For Deutsche Bank's Mr. Brauninger, the problem is that whichever parties make up the next government, there will be internal opposition. "Whoever is involved, the government is going to be unstable," he said. "It won't be easy to push anything through, however important."