Guest article in the Börsen-Zeitung from 23 April 2024 with Heiner Herkenhoff, CEO of the Association of German Banks.
“Navigating turbulent times” is the title of the 23rd German Banking Congress, which takes place today at Berlin’s Westhafen. A quick look in the daily newspaper, on news portals or news programmes on any given day is enough to get a sense of these turbulent times. Whether it’s war or crises on our doorstep, the uncertain future of the US, economic stagnation in Germany or combatting climate change – the challenges for politics, the economy and society are enormous.
Bilder vom Bankentag 2024
Banks feeling effect of turbulent times
Banks are also experiencing the effects of these turbulent times. The high energy costs and weak economy are as much of a burden to their business customers as stifling bureaucracy and the uncertainty over whether global tensions and isolationist tendencies might continue to throttle exports. Many businesses integrated into global markets are attempting to diversify their supply chains and customer markets and are relying on support from their banks to do so. At the same time, the willingness to invest abroad is growing because it is cheaper. Germany as a location has meanwhile become expensive and almost unattractive, particularly for energy-intensive sectors.
There also appear to be turbulent times ahead for retirement provision. Demographic changes that have already become apparent in today’s labour markets will push the pension system to its limits and beyond in the coming years. Although turbulent times usually come with a good deal of uncertainty and unpredictability, the latter does not apply to demographic developments. We have long been aware that fewer and fewer working people in Germany are having to finance the pensions of increasing numbers of older people. Nevertheless, this issue has been swept under the carpet somewhat in political debates in recent years.
This might be to do with politicians thinking for a long time that they were reasonably safe on the matter. The introduction of Riester pensions over 20 years ago was finally an acknowledgement that government pensions would, in many cases, not be sufficient to guarantee an adequate income in retirement. Some corrections to the statutory pension scheme aimed at sharing the burden between generations more fairly, including raising the retirement age and, in particular, the steady rise in the labour force participation rate in recent decades, have ensured that the pension contribution rate has remained reasonably stable to this day. Since around 100 billion euros goes into the pension fund from the federal budget every year anyway (and there are apparently sufficient funds available), they believed it was also possible to afford a retirement age of 63 and the maternity pension on top.
Facing a stern test
However, with the imminent retirement of baby boomers from the labour market, the promise of an adequate state pension will face a stern test and the system will require fundamental reform. But, even then, there’ll be no way to outsmart the demographics issue, unless we finally start to realise that only by making use of the chances and opportunities for returns from the capital market, will citizens be able to build up sufficient assets for their retirement. In this regard, the Riester pension was a tentative start, but it could not meet the expectations placed on it for a variety of reasons. New solutions are required.
The German federal government submitted a draft bill at the beginning of March, the objectives of which were to keep pensions consistent at today’s level and to provide for the build-up of generational capital for the statutory pension scheme. While stabilising pension levels has meant an increased burden on younger pension contributors and is therefore rightly criticised by many experts, the verdict on intergenerational capital has been more mixed. Every year until 2035, tens of billions of euros from the federal budget are to be invested in the capital market. From 2036, the annual returns from these investments will then go into the pension fund. The general consensus is that this approach is correct, but it is not expected to provide any significant reduction in the burden as a result.
Above all, the legislative package does not include strengthening private retirement provision. In fact, younger employees will have even fewer financial resources available for private retirement provision due to the disproportionate increase in contributions to the state pension scheme as a result of the frozen pension level.
And it’s not as if politicians are not aware of this issue. The coalition agreement of the traffic light government states that it would not only examine the possibility of introducing a funded component to the statutory pension scheme but would also look explicitly at strengthening private retirement provision. At the end of 2022, the German government then decided to set up a focus group for private retirement provision, which met for the first time in January 2023 and published its final report six months later. The specific recommendation contained in the report for an additional eligible retirement provision portfolio, which might contain various securities such as shares, actively managed and passive funds such as ETFs, could make it considerably easier for broad sections of the population to access long-term asset building.
Whether or not the German government will implement the right approaches recommended by the focus group for simple, flexible and convenient private retirement provision in the current legislative period, however, is still uncertain. Although nobody in a responsible position in politics would deny that there is no alternative to strengthening private retirement provision, the mental hurdles to making greater use of the capital market seem almost insurmountable for many.
Looking to Europe
When members of the government demonstratively highlight that the “significant part of retirement provision” will continue to come from statutory pensions in future, this does not exactly increase people’s willingness to move to private retirement provision. We should recognise and use the opportunities presented by the capital market, especially for retirement provision. This is also a matter for politicians at the European level because a stronger and deeper European capital market would also benefit private retirement provision.
It is possible that the strong reluctance to engage with the capital market in Germany is a symptom of a society that shies away from risk and favours the familiar. But that approach isn’t helpful. For many reasons, we in Germany need to build a new relationship with the capital market, as it is also needed to mobilise the necessary financial resources for the transformation of our economy. In the case of retirement provision, taking a cursory glance at other European countries is enough to find good examples of how the capital market can be used efficiently.
