German pensions: a shift towards capital markets

Research evidence excerpt

German pensions: a shift towards capital markets

IdeaMthe introduction of a mandatory capital-funded pension element should support a

long-awaited reallocation of German savings into higher yielding assets, increasing

the efficiency of savings. And it would help to deepen European equity markets

(more below), prospectively improving firms' costs of capital and increasing

investments. Second, the government's intention to fully implement the proposal

sends a strong signal for the willingness to act on structural reforms. Third, longer

working lives will help somewhat cushion the expected shrinking labor supply due

to demographic change (see our deep dive here).

Exhibit 1: Illustration of possible Exhibit 2: Illustration of possible

development of pension level (as a % of development of entry pension level

last salary) without reforms taking into account the proposed

measures

Source: Pension Commission Report

Exhibit 3: Illustration of the possible Exhibit 4: Illustration of the possible

development of total contribution rates development of the share of federal

taking into account the proposed subsidies in GDP taking into account

measures the proposed measures

Capital Markets implications. From a capital markets perspective, we view today's

announcement as a step in the right direction. The most relevant measures for

equity and financials investors are:

- Introduction of a funded pension component (Kapitalrente). The proposal would

introduce a funded element within Pillar 1, broadly modelled on Sweden's AP7

system, with a contribution rate of 2% (equally split by employee & employer)

invested in capital markets (which compares to 2.5% contributions in Sweden).

While the phased implementation (starting at 0.5% in 2028 and increasing