Germany to create investment fund to support strained pension system

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The German government will invest billions of euros in capital markets and use the proceeds to shore up the country’s embattled pension system, according to a draft law unveiled on Tuesday.

The legislation will see the creation of a fund for investing in stocks, backed by loans taken out by the federal government, that is forecast to be worth at least €200bn by the mid-2030s.

Proceeds from the investments will be used to keep the pension system stable and ensure that payments remain at 48 per cent of an average wage until the end of the next decade while avoiding steep increases in social security contributions. Finance minister Christian Lindner said the reform amounted to a “paradigm shift” in pension provision.

The plan is designed to alleviate pressure on a pension system that is expected to come under huge strain in the next few years as a whole generation of “baby-boomers” born in the 50s and 60s enters retirement.

Already the federal government has to subsidise Germany’s statutory pension fund to the tune of €110bn a year — almost a quarter of the entire state budget.

“The system must remain fair for future generations, for those who profit as pensioners and the others who finance the system,” Lindner said. “For that reason our pension provision requires an update.”

As a first step, the government will raise €12bn in debt this year and transfer it to the new fund, which will be managed by an independent public foundation. That amount will increase by 3 per cent annually and be augmented by proceeds from the sale of state holdings.

The finance ministry forecasts the size of the fund to reach €200bn by the mid-2030s and returns on investments will enable distributions of €10bn a year to the statutory pension fund from 2036. Finance ministry officials said the hope is Germany can ultimately move in the direction of Sweden and Norway where individuals can invest in capital markets within the framework of the state pension system.

Lindner said the reform was “long overdue”.

“We should have started to exploit the opportunities of the capital markets for the statutory pension system a long time ago,” he said. “It’s not yet the sole solution for the challenge of financing pensions in the long term, but a first important step has been taken.”

Some critics have said the reform would introduce an element of “casino capitalism” into Germany’s pension provision.

Christiane Benner, head of IG Metall, Germany’s largest union, said it was a “step into the unknown”. “[It] doesn’t make old-age provision in Germany any safer,” she said. “It’s a debt-financed bet on some vague income in the future . . . [and] moves pensions closer to the risks of financial markets.”

Hubertus Heil, labour minister, dismissed the criticism. “This is money that is invested well, for the long-term,” he said. Individual pension contributions wouldn’t be used to buy stocks and shares, but “money from the state”.

However, the reform will not prevent pensions contributions from rising. According to the draft law on the new fund, these will rise in the coming years to 22.3 per cent of gross salaries, from 18.6 per cent currently. The bill says that without the new investment fund, contributions would have risen to 22.7 per cent by 2045.