A quiet reform with significant impact? Germany’s coalition government is introducing a new model for private old-age provision. Can this successor to the Riester pension scheme deliver?
The state-subsidized private pension system in Germany is undergoing a fundamental overhaul. After years of debate across various administrations, the Riester pension, introduced in 2002, will be replaced by a new system designed to be more profitable, simpler, and more cost-effective. On Tuesday, the parliamentary groups of CDU, CSU, and SPD announced amendments to the draft bill, addressing criticisms regarding fees for the proposed new pension deposit account and the level of family support. This clears the way for the Bundestag to pass the legislation on Friday. The new regulations are set to come into effect on January 1, 2027.
Why is this reform necessary?
The Riester pension was initially designed to provide financial security for citizens whose statutory pensions were projected to be insufficient in retirement. It was supported by state subsidies and tax benefits. Furthermore, providers were mandated to guarantee 100% of contributions, eliminating investment risk. However, this guarantee severely limited potential returns. Concurrently, high initial and administrative fees were incurred, benefiting insurance companies and financial institutions.
Consequently, many individuals have opted to either stop contributing to their Riester contracts or cancel them entirely. By the end of 2024, data from the Federal Ministry of Labor showed just under 15 million Riester contracts, but an estimated 20 to 25 percent of these were no longer receiving contributions.
What options will be available in the future?
Finance Minister Lars Klingbeil (SPD) has proposed a multi-faceted approach. The new system will continue to offer a private pension option guaranteeing 100% payout of contributions. Additionally, a variant with an 80% guarantee will be introduced, allowing insurers to invest contributions more profitably in the capital market. Crucially, a new “pension savings depot” (Altersvorsorgedepot) will be launched. This option aims for higher returns from capital market investments but comes without any guarantees.
What improvements were made in the Bundestag?
Klingbeil’s initial proposal to cap costs for a standard pension savings depot (intended for those with limited capital market experience) at 1.5 percent faced widespread criticism, as it was deemed to hinder the possibility of high returns. The CDU, CSU, and SPD have now agreed on a cost cap of 1 percent of effective costs.
Another significant change is the inclusion of self-employed individuals, who will now also have access to subsidized pension provisions. The coalition partners emphasized, “Because even among the self-employed, we observe precarious situations in old age.”
How much will the state contribute?
State subsidies are set to become simpler and more generous for many participants. The complex calculation of a personal minimum savings amount will be abolished. In the future, every euro saved, up to a specific limit, will receive a direct state subsidy.
- Basic Allowance (Grundzulage): For every euro contributed, the state will add 50 cents. This applies to the first 360 euros of annual savings. For every additional euro, up to a maximum contribution of 1800 euros, 25 cents will be added.
- Child Allowance (Kinderzulage): Families, in particular, will receive enhanced support. Parents will now qualify for the full child allowance of 300 euros per child per year by saving just 25 euros per month. The original government draft had proposed a monthly saving of 100 euros. Up to this amount (25 euros), the state will effectively double every euro personally contributed for each child.
What does this mean for the state budget?
The amendments negotiated by the CDU, CSU, and SPD will increase the cost of the new pension scheme. According to the coalition, the inclusion of self-employed individuals alone will incur additional costs of approximately 370 million euros. Furthermore, raising the subsidy rates will cost the state another 15 million euros.
Klingbeil praised the compromise, stating, “We are making it easier for all generations and income levels to save privately for old age.” He emphasized that private pension provision will become more affordable, simpler, and less bureaucratic. He also promised that the federal government is working on implementing the “Early Start Pension” (Frühstartrente). Eventually, all children and young people between six and 18 years old are expected to receive 10 euros per month from the state for a pension savings depot. This initiative will begin with the birth cohort of 2020, and older cohorts are planned to be included from 2029, though the exact scope remains to be determined.
When can the new provision be concluded?
The Bundestag is expected to pass the law this week, after which it will move to the Bundesrat (Federal Council) for approval. The new pension products are slated to be available on the market by January 1, 2027.
Until then, holders of existing Riester contracts have time to consider switching to the new system. While existing Riester contracts will be protected, individuals can transition to a new model without having to repay previous subsidies. However, the Ministry of Finance states that any potential switching, setup, and distribution costs incurred will be legally capped.
