The government’s retirement plan: This is the verdict of a consumer advocate

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Mr. Nauhauser, the Federal Ministry of Finance has now presented its plans for a private retirement savings account. As a consumer advocate: What were your first thoughts?
There are a few improvements for people who take control of their finances. However, the law does not solve the central problem with private pension provision. Because the vast majority of consumers rely on advice. They trust the banker or insurance broker that they know from the sports club, for example. However, their advice is a problem because it is not needs-based.

To what extent?
Consumers continue to be sold what earns commissions and not what meets their needs. This has been an unresolved problem since the introduction of the Riester pension. The legislature has tried to solve this with transparency requirements – with leaflets for costs, risks and opportunities. But more transparency does not address the problem because retirement provision is a trust asset. There is an incredible variety of complex products. The new law will make this diversity even greater, which increases the need for advice. The sales teams will be happy.

So should the retirement savings account have been left alone?
No, reform is urgently needed. However, we have always demanded a standard government product based on the Swedish model. That would have taken the false incentives of commission-driven sales out of the equation. A standard product is inexpensive and simple. Savers could set their share quota depending on their willingness to take risks. Three levels are enough because the investment is globally diversified. Instead, everyone can now speculate on individual stocks with government support. This could increase the scene of dubious financial influencers.

According to the motto: “With this stock you will retire rich. Everything about that in my trading seminar”?
Exactly. Such dubious offers are already booming today. People are told how they are supposedly guaranteed to beat the market. In fact, only very few people manage to do this, and almost no one manages it in the long term. Sharing in the returns of the stock market is a central success factor in building wealth. Individual stocks are unnecessarily risky, so a broadly diversified ETF is the first choice.

So what should people do if their advisor calls them soon to talk about their new retirement savings account?
Hang up and first inform yourself independently. Very easy. In this country, consultants are not consultants, but rather salespeople. It is already foreseeable that many insurers will send their sales teams to get rid of old Riester contracts with guaranteed interest rates of 3.25 percent and convert them into new, supposedly opportunity-oriented contracts with an 80 percent payout guarantee. In this way, you get rid of the obligation to provide high guarantees and can collect commissions for new business. In individual cases it will definitely be necessary to switch to the new retirement savings account. But as long as there is no independent advice out there, you should do your research beforehand or take the system into your own hands.

The Greens are apparently still pushing for cost caps in sales. Is that a solution?
No, this is just tinkering with symptoms. The costs are high because the distributor sells the products for a high commission. If you put a cap on the costs, instead of Riester, something else is sold that earns more. As I said: You should have done it similarly to Sweden and standardized the product through legal requirements.

Would it have become a product for the masses if no one drew attention to the products?
If you want to reach everyone, you have to introduce mandatory private pension provision. Or take the middle path, which was also discussed in the responsible focus group: an opt-out variant. If you don’t want the standard product, object. We are not calling for coercion or opt-outs because it is not our place to make decisions about consumers’ scarce money. Today’s system produces distribution costs and disincentives and the sufferers are the savers.

Insurers say reduced administrative burdens and increasing competition will lead to lower costs for pension policies. An opportunity-oriented pension policy will probably already be available for 1.1 percent TER in the future. Do you believe in it?
No, then the costs of insurance sales would have fallen in recent years. The competitive pressure from ETFs has existed for many years. And yet only the costs of ETFs have gradually fallen, while those of insurers have hardly fallen at all. And even 1.1 percent annual costs eat up more than a quarter of the income over 35 years.

The insurers still want to push the pension obligation into the final law. This would mean that contributions would be paid out until the end of life instead of until the age of 85. What do you think of it?
The end of compulsory retirement is one of the few praiseworthy improvements of this reform. It’s a good thing to give consumers the choice of how they want to structure their pension payouts. The only thing that would have been better was an additional option to withdraw the money completely if necessary. The end of the pension obligation is also a consistent reaction to the insurers’ business policy. A whopping 30 percent of a 67-year-old’s assets are currently collected as a bonus just to secure a possible pension from the age of 85. The insurers calculate with their own mortality tables, where you have to be 94 years old or older before you get the premium back through pension payments.

Many people are already wondering what they should do with their old Riester contracts – and how they can transfer them to the new world, or at what cost. What do you expect?
The switching costs for transferring existing credit are already capped at 150 euros and it will stay that way. However, providers can and will charge new costs for new contracts. That’s why you have to wait for the offers and then inform yourself independently.