Money managers chase US$577 billion historic German pension shift

[FRANKFURT] One of the biggest reforms in Germany’s pension system since chancellor Otto von Bismarck founded it in the late 19th century is about to hand modern fund managers a new empire of cash to deploy.

After many years of accepting puny returns in exchange for guaranteed capital, the nation is about to move away from conservative securities and insurance policies and also subsidise a broader range of investments, from index tracker funds to private credit.

In a three-pillar system, the private pension pot alone is set to double to some 500 billion euros (US$577 billion) in the coming decade, according to BVI, the country’s fund industry lobby.

Managers such as Deutsche Bank’s DWS Group, JPMorgan Asset Management and Vanguard Group are racing to have new products ready for Jan 1, 2027, when the new system takes effect.

They already have a tailwind – new interest in retail investing has helped the fund industry in Germany break through five trillion euros in assets under management this year. 

While the current reform is being driven by Chancellor Friedrich Merz’s government, the political shift that has enabled the new approach has been long in the making, gaining steam under the previous administration in 2023.

It signals the realisation in Europe’s largest economy that preparing for old age has fundamentally changed – Germans are finally embracing more risk in the pursuit of a comfortable retirement.

“The pension reform will change the world of retirement savings in Germany, with a move away from deposits to wealth accumulation on capital markets,” said Bjoern Deyer, head of retirement provision at DWS. “It’s cascading through the country’s asset management industry.”

Pension provision has become the single biggest project at DWS, which manages some 1.1 trillion euros. The firm has allocated a “significant amount” of resources and more dedicated staff to pension provision, Deyer said.

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It has started an awareness campaign for retail clients and summer training on the new products for its sales partners, he said.

That is because millions of the country’s citizens could be about to take their first steps as investors, driven by the realisation that the pension arithmetic their parents and grandparents relied on is not likely to work out well for them.

Not enough money for retirement

German retirement advisers often recommend that pensioners secure 80 per cent of their last net salary to maintain their quality of life. Yet the figure is well below that for many people.

The “net replacement rate” – how much of pre-retirement earnings one can count on – from the mandatory pension for average workers starting out this decade is set to be 53 per cent, according to the Organisation for Economic Co-operation and Development (OECD).

Including voluntary private pension systems increases the figure to about 68 per cent, OECD calculations show.

“There are trillions sitting in savers’ bank accounts, and that money needs to become more productive to boost citizens’ financial resilience and Europe’s economy,” Ann Prendergast, head of Europe, the Middle East and Africa at State Street Investment Management said.

There are several reforms underway. The statutory pay-as-you-go pension, which already eats up about a quarter of the federal budget, looks likely to channel more than 30 billion euros into financial markets.

The government also wants to boost participation in occupational pensions, which are topped up by employers.

But for now, the financial industry is focused on one which will allow private money to flow into subsidised brokerage accounts. It replaces the Riester system, introduced in the early 2000s, which offered guaranteed capital, yet low returns.

The new system takes the country one step closer to the US, where people invest in securities and funds via tax-efficient Individual Retirement Accounts. 

The incoming German set-up is widely expected to benefit cheap exchange-traded funds because the so-called standard account will cap fees at 1 per cent.

Investors can pay more to access other products, such as European long-term investment funds, or ELTIFs, the retail vehicle for private equity, private credit and infrastructure.

Road map for inflows

Depending on the take-up, S&P Global Ratings says the reform will unlock an additional 26 billion to 56 billion euros of annual inflows into German private pensions after an on-boarding period of as long as two years.

That gives the fund management industry a road map for inflows into the next decade, provided they get clients in the door early. 

“Once you’re in, you may be reluctant to switch,” said Benjamin Heinrich, an analyst at S&P, said. “I think the stickiness of German clients is underestimated. Some banks view this as a once in a lifetime opportunity. A lot of the market share will be distributed next year.”

Sales staffers at asset managers are pitching to get their funds included in the new accounts, according to several industry executives. They are touting low fees on ETFs and trying to convince advisers of the superiority of their private markets funds.

“The clock is ticking for those who want to have their products ready by January,” said Fabian Behnke, who is responsible for Vanguard’s strategic accounts in Germany. “We’ve agreed some partnerships already and are holding talks with various other insurers, brokers and banks right now.”

BlackRock is working with banks and neo-brokers to provide access to ETFs and active funds, as well as private markets investments via their platforms.

Despite negative headlines about private credit, the industry successfully lobbied the government to include ELTIFs in the account. Their long-term nature makes them suitable, according to Thomas Richter, chief executive officer of BVI.

“It’s the fact that Germany isn’t just banning things, that has led to the enthusiasm we’re seeing,” Richter said.

More competition for insurers

While the inflows are expected to benefit the wider financial industry, they also introduce more competition for insurers, which have long dominated the business of life-time annuities with guaranteed capital.

Savers will still have the option to pay into similar guaranteed products in addition to the new brokerage accounts.

There is probably about 225 billion euros in Riester funds and more than a quarter of that will move, consultancies Sirius Campus and Aeiforia estimated in a report in May.

“Neo-brokers are likely to draw the largest amount of new clients among the wealthy and younger investors,” Philip Franck, a Frankfurt-based partner at consultancy ZEB, said.

Still, Allianz, Germany’s biggest insurer, said it will offer a range of products with and without guarantees. Challenger firms – such as neo-broker Trade Republic which has recently offered private-markets access from as little as one euro – are also preparing for stiff competition. 

State Street earlier this year teamed up with a digital broker owned by Germany’s Commerzbank to offer a low-fee equity ETF. The asset manager is holding talks with other German platforms to further bolster its distribution in the country, State Street’s Prendergast said.

The need for reform has long been evident in Europe. As life expectancy rises and fertility rates fall, the viability of pension systems is increasingly tested. In Germany, there will be just two working-age people to every retirement-age person within a decade while interest rates also remain low by historical standards.

After two world wars, the country’s pension system has already seen reforms, yet a bigger role for individual Germans in the next chapter looks unavoidable.

“Germans have known this system for more than 130 years since Bismarck; the state handling pensions was part of their DNA,” said BVI’s Richter. “This system is slowly eating us up. The reforms are a huge step for Germany, but we’re still behind the curve.” BLOOMBERG