Private Insurance and Old Age Provision in Germany

1
Private Insurance and Old Age Provision in
Germany

• Peter Schwark, GDV
• Head of Department Social Policy and Pension
  funds

2
Outline

• The Life Insurance Market in Germany
• The German Statutory Pension System
• Reform projects in the pension field
• Conclusion

3
German Insurance Markets 2002 Premium in EURO
million / Growth rate 2002
Accident 5.6 EURO bn. 1,5
Life 65.1 EURO bn. 4,5
Property 47.2 EURO bn 3,1
premium total 141.0 EURO bn.
Health 23.1 EURO bn 6,4
4
Top Ten of Life-Insurers 2002 Premiums in EURO
bn.
5
Life Gross premiums written in EUR million
3.5
) estimated business trend
6
Life Benefits in EUR million
) estimated business trend
7
New business by type of insuranceEndowment
insurance, annuity insurance and unit-linked life
insurance, number of contracts in
8
Life insurance by international comparison
Share of total life premium 2001 Source CEA
9
Life insurance by international comparison
10
Benchmarking pensions )
) Income structure of 2-Persons-Pensioners-Househ
olds Source Miegel/Börsch-Supan (1999)
11
Outline

• The Life Insurance Market in Germany
• The German Statutory Pension System
• Reform projects in the pension field
• Conclusion

12
German pension system 3 pillars
statutory pension insurance (PAYG)
occupational pensions
life insurance
13
Pension provision in Germany Details
Supplementary pensions for public sector employees
Civil servicepensions
2
10
Lifeinsurance
17
5
Occupational pension schemes
66
State pension system
Source GDV, Alterssicherungsbericht 2001
14
Development of the statutory pension system

• 1889 Founded by Chancellor Bismarck as
  disability insurance
• 1911/1916 Introduction of old age pension system
  (retirement with 65)
• 1957 Increase of old age pensions aiming at
  maintaining the reached standard of living
  (indexation of pensions with general wage trend)
• 1972 Further improvement of benefits
• 1989/1996 First reforms to make PAYG system fit
  for the demographic challenge
• 1997 Introduction of a demographic factor
  reducing pension dynamics
• 1998 Newly elected Government cancelled 1997
  reform
• 1999 Channelling of newly introduced Eco-taxes
  into the PAYG-system

15
Development of contribution rates to public
pensions
estimation
Source VDR
16
Social security contribution ceiling (1960
2004) Old and new Länder, per month
5.150
4.350
Source VDR
17
Part of public pensions financed by the Federal
Government until 1990 West-Germany,
since 1991 Germany
Source VDR
18
Demographic perspectives for Germany
Source Birg/Flöthmann, 2000
19
Population in Germany age-groups
2000 82 Mio. thereof 0 to 20 17 Mio. 20 to 60
46 Mio. 60 and older 19 Mio. 2030 77
Mio. thereof 0 to 20 12 Mio. 20 to 60 36
Mio. 60 and older 29 Mio. 2050 68
Mio. thereof 0 to 20 10 Mio. 20 to 60 30
Mio. 60 to 28 Mio.
60 and older
20 to 60
0 to 20
Source Birg/Flöthmann, 2000
20
Development of old age dependency ratio
Immigrated Population Population in Germany
German Population
Source Birg/Flöthmann, 2000
21
Outline

• The Life Insurance Market in Germany
• The German Statutory Pension System
• Reform projects in the pension field
• Conclusion

22
SGB
Pension-Reform I Reducing Public Pensions

• Cuts in PAYG state pension system
• Diminishing the level of pensions from today
  70,7 to 64 in 2030 of average net-income
  (standardized for an average earner after 45
  contribution years).
• Long term objective
• Limit the contribution rate to 20 of wages
  until 2020, and to 22 until 2030.

23
Pension-Reform II increasing private (funded
pensions)

• Retirement Savings Law (AVmG)
• introduction of Riester scheme for
  supplementary (funded) pension provision (2nd
  or 3rd pillar) gt voluntary scheme
• strengthen occupational pensions
• introduction of pension funds in Germany

24
Riester conditions for individual pension
plans

• Withdrawals starting at age 60 (at the earliest)
• Minimum guarantee on benefits (capital
  maintenance)
• Lifelong annuity or withdrawal plan coupled with
  annuity from the age of 85

25
Riester market

• New business in Riester products
• Number of contracts for each quarter

26
Riester market

• Reasons for unsatisfactory spread
• inadequate consciousness of the need to make
  individual provisions
• economic situation high unemployment,
  declining income
• complex subsidization

27
Occupational pension schemes in Germany, Assets
2001
Support fund (Unterstützungskasse) ( 22,8 bn)
Total 620.4 bn
Retirement fund (Pensionskasse) ( 72,7 bn)
7
21
59
13
Direct insurance (Direktversicherung)( 43,8 bn)
Book reserves (Direktzusage)( 202,3 bn)
Source aba Arbeitsgemeinschaft für betriebliche
Altersversorgung e. V.
28
Taxation of occupational pensions

• EET taxation
• up to 2418 EURO p.a.
• retirement fund, pension fund
• Flat-rate taxation (20 )
• up to 1.752 EUR
• direct insurance, retirement fund
• Riester incentives (subsidies and EET taxation)
• increasing from from 525 to 2100 p.a. (2001-2008)
• direct insurance, retirement fund, pension fund

29
Outline

• The Life Insurance Market in Germany
• The German Statutory Pension System
• Reform projects in the pension field
• Conclusion

30
New reforms ahead

• Further reforms in the statutory system
  decreasing pensions levels, increasing the
  pensionable age
• Introduction of a full taxation system for old
  age pensions
• Reform of tax-incentives for private and
  occupational system less bureaucracy or more
  regulation ?

31
Report Rürup II
Mission of the Rürup II Committee The Rürup II
Committee should submit proposals by the autumn
of 2003 with a view to stabilizing the financing
of pension, health and long-term care insurance
on a long-term and sustainable basis.
32
Implications of Rürup II for PAYG Pensions

• Starting situation of the Rürup II Committee
• Without a new reform of statutory pension
  insurance the following developments are likely
• Contribution rate will rise from 19.5 to 24.2
  by 2030.
• Gross pension level will decline from 48.2 to
  41.9.
• Slow development of old-age provision operated
  on a funded basis.
• Conclusion Despite the so-called great reform
  in 2001 state old-age provision operated on a
  pay-as-you-go basis is not ensured on a
  sustainable basis.

33
Proposals of Rürup II

• Dismissed proposals
• extension of contribution ceiling and of the
  category of persons liable to insurance
• Positive proposals on statutory pension
  insurance
• raise retirement age from 65 to 67 beginning in
  2011
• modification of pension adjustment formula
• Positive proposals on private pension insurance
• Simplification of the Riester-Incentives