Growing Pensions Through Investment

To date, asset-backed pensions in Germany remain underdeveloped. The OECD average for assets earmarked for retirement stand at 95 per cent of gross domestic product, whereas in Germany it is only six per cent.

Sweden has supplemented the state pension with a mandatory asset-backed component. 2.5 per cent of pensionable income is automatically channelled into managed funds. At the same time, a cross-party pension group ensures that fundamental pension reforms do not become a pawn in short-term political interests. “A mandatory asset-backed component would make the German pension system more robust and strengthen younger generations’ confidence in the system’s long-term viability, because assets are visibly being built up for future pensions,” says cep legal expert Anja Hoffmann.

The United Kingdom demonstrates how occupational pension provision can also be strengthened. Since the introduction of automatic enrolment, 82 per cent of employees have joined the occupational pension scheme. The system is supported by a state-run fallback scheme (NEST), which enables small businesses in particular to offer their employees an occupational pension without red tape.

“The UK and Sweden demonstrate that sustainable pension reform requires both institutional stability and simple, automatic pension solutions,” says cep economist Matthias Kullas. Furthermore, the study recommends introducing a front-loading mechanism in Germany based on the Swedish model. This increases the initial pension and thus cushions the drop in income upon retirement.

The study “Growing Pensions through Returns – What Germany Can Learn from Sweden and the United Kingdom” was produced by cep on behalf of the Brussels office of the Friedrich Naumann Foundation.