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Germany’s biggest overhaul of its pension system in more than two decades is set to hand hundreds of billions of euros in retirement savings to global asset managers, at the expense of insurers.
Executives expect a relatively small group of fund managers to grab the majority of inflows resulting from reforms to replace the country’s guaranteed Riester pensions with accounts loosely modelled on US 401(k) plans, which take effect in January.
The new regime will slash the fees that can be charged to savers. On the standard version of the new state-subsidised account — the Altersvorsorgedepot — fees will be capped at 1 per cent, compared with as much as 4 per cent in total annual costs for existing Riester accounts.
That means that low-cost products such as passive index trackers are likely to attract the bulk of savers’ assets.
“The biggest inflows will ultimately go to the large ETF providers — BlackRock, Vanguard, DWS and Amundi,” said Tamaz Georgadze, chief executive of savings platform Raisin.
But they will face intense competition from Germany’s incumbent distributors such as DWS, Union Investment, Deka, as well as the country’s savings and co-operative banks, which want to establish the accounts as the base from which to sell customers other services.
Digital brokers such as Trade Republic and Scalable Capital, and foreign entrants including JPMorgan Chase’s asset management arm and fintech Revolut will also compete for the flows.
“The retirement account will become the new current account,” said Björn Deyer, head of retirement solutions at DWS. “It will become the nucleus of the customer relationship.”
The shake-up of the German market is part of a plan by Berlin to boost returns for retirees and narrow the country’s pension gap by encouraging workers to invest directly in capital markets.
Morgan Stanley estimates that the reforms could result in €40bn of flows into capital markets annually, while Vanguard said the accounts could draw €150bn within five years. That would roughly match what Riester amassed in more than two decades.
Banks, brokers and fund managers are racing to prepare their products ahead of the start of the new regime in January.
“We’re not talking about one product but about the gradual development of a capital-funded retirement system,” said André Munkelt, head of Morgan Stanley’s continental European subsidiary.
The new system dismantles many of the features that made Riester one of Germany’s least popular savings products, associated with low returns, high costs and complex subsidy rules.
Rules that guaranteed savers would be repaid all their contributions in full pushed providers into low-yielding assets such as government bonds, making it difficult for retirees to beat inflation.
“Guarantees sound attractive, but they cost investors significant returns over the long run,” said Jakob Tanzmeister, a managing director at JPMorgan Asset Management.
The reforms will also abolish the requirement that most subsidised pensions be converted into a lifetime annuity, allowing savers instead to choose a withdrawal plan that must run at least until the age of 85.
“With the end of mandatory lifetime annuities, one of the sacred cows has been slaughtered,” said Alberto del Pozo, head of pensions and partnerships at Union Investment.
The insurance industry has warned that increased flexibility will also expose workers to a higher risk of running out of money or suffering losses during times of market volatility.
Under the current system, two-thirds of Riester accounts are held with insurers. German insurer Allianz has the biggest market share, with 1.5mn customers, followed by smaller operators such as R+V and Munich Re’s Ergo.
The German Insurance Association (GDV) said life-long annuities were “the best protection in old age for most people”, adding that almost half of women and about a third of men entering retirement would live to 90.
Some executives have also questioned whether the new accounts will be ready by January as providers still need to build systems to administer subsidies, exchange data with the government and certify products.
“Many institutions underestimate how complex implementation really is,” said Martin Kassing, chief executive of investment infrastructure company Upvest. “Some providers simply won’t be ready in time.”
