On Friday, the German Bundestag approved a comprehensive reform of state-subsidised private retirement provision. After years of criticism of the Riester pension, a new retirement savings account is to take over the central role from 2027 onwards. The aim is a system that is clearer, more cost-efficient and offers higher returns – and that finally motivates more people to make private provision for their retirement.
The political ambition is high. In future there will no longer be just a single standard model, but several variants with different safety guarantees and return expectations. These include products with full capital guarantees, models with a reduced guarantee – around 80% of contributions – and a retirement savings account without such commitments that is fully geared towards long-term return opportunities on the capital market. In addition, a government-organised standard account is planned, designed to convince with capped costs and simple rules.
The German government’s plans are ambitious. In his speech in the Bundestag, Finance Minister Lars Klingbeil (SPD) spoke of a “milestone“. The reform is the third building block alongside an allegedly stable state pension and a recently strengthened occupational pension scheme, and is expressly aimed at “all generations and all income levels“.
The clear focus is on encouraging lower and middle-income groups to take on more responsibility for additional provision – as well as on groups that have so far been poorly or not at all reached, such as many self-employed people.
The key points at a glance
The core elements of the reform can be summarised as follows:
- state subsidies of up to around 540 euros per year (graduated according to contribution level)
- additional child allowance of 300 euros per year for eligible children
- inclusion of self-employed people who have often been overlooked so far
- Several guarantee and return models:
- 100-%-guarantee
- 80-%-guarantee
- retirement savings account without guarantee
- Planned government standard account with capped costs
- In the longer term, an early-start pension for children with regular government contributions
How the retirement savings account is supposed to work
At the heart of the reform is the move away from an insurance-like Riester pension towards a genuine investment account. Instead of relying primarily on interest guarantees, the retirement savings account is based on broadly diversified capital market investments. Whether via index funds, actively managed funds or other vehicles – the key point is that it can tap long-term return opportunities that traditional savings products can hardly offer.
The reform provides several levels of protection: Those who are particularly security-minded will still be able to choose products that guarantee 100% of contributions for the payout phase. Those who are prepared to take on more risk can opt for variants with reduced guarantees, such as 80% of the capital. And those who want to embrace the full logic of the capital market choose an account without guarantee commitments and accept significantly greater fluctuations in return – with correspondingly higher return prospects over the long term.
The planned standard account, to be offered by a public provider, will act as a kind of reference model. It is intended to operate with clear investment guidelines, a cost cap and uniform rules.
New funding model: subsidies instead of complicated Riester logic
At least as important as the product structure is the redesign of the funding mechanism. The old Riester funding with a fixed basic allowance and child allowance was very difficult to understand, bureaucratic and in many cases inefficient.
The new system relies more heavily on graduated subsidies that are directly linked to the saver’s own contributions. For the first euros saved, the state wants to add 50 cents; for further contributions up to a certain limit, this top-up halves to 25 cents. This is intended to provide particularly strong incentives for small savings amounts by subsidising them at a high rate. In total, an annual basic subsidy of up to 540 euros should be possible.
There is also an additional child allowance of 300 euros per year. Furthermore, the planned inclusion of self-employed people is particularly important. The aim is to reach groups that previously had little access to subsidised private provision more effectively.
Capital market opportunities for lower and middle incomes
The new system is therefore significantly more capital market-oriented than the previous one. For lower and middle-income earners this is mainly an advantage if three conditions are met:
What savers can take away from the reform
The retirement savings account creates a new funding product clearly linked to the capital market. The state aims to make additional private pension provision attractive through subsidies, child allowances and a standard account with a cost cap. For many people, especially those on lower and middle incomes, this can be a real opportunity to supplement their almost certainly far too low pension payments.
At the same time, the reform is far from a sure-fire success. It requires savers to reflect on their own risk appetite, their time horizon and the role of the account within their overall retirement planning. The state pension remains the foundation, with occupational provision an important additional pillar. The retirement savings account is added as a third pillar, which is particularly effective when saving starts early and the long-term logic of the capital market is understood and accepted.
Whether the reform will restore trust in private pension provision therefore depends less on buzzwords such as “milestone” or “standard account” than on practice: How low are the costs in reality? How easy are the products to understand? How fair and reliable is the funding mechanism? And is it possible to clearly spell out the opportunities without downplaying the risks?
All of these questions will have to be clarified in the debate about the retirement savings account even after the Bundestag’s decision – an equity pension that actually stabilises the pension system, it is certainly not. In any case, the first step has now been taken!
