In May 2001, the German Federal Council approved the second part of the government's pension reform legislation, which will come into force on 1 January 2002. After months of controversial debate, the upper house of parliament has now cleared the way for the introduction of a private branch of the pensions system. In expectation of substantial sums of money being invested, not only banks and insurance companies but also the social partners are now seeking to provide new opportunities for private pension investment
On 11 May 2001, the Federal Council (Bundesrat) (essentially parliament's upper house), finally approved the second part of the government's pension reform and thus cleared the way for a substantial revision of the German pensions system. In essence, the reform will replace the current "pay-as-you-go" state pension scheme (whereby current pensions are covered by the contributions of those currently in employment) by a dual pension scheme, consisting of both a reformed pay-as-you-go state pension and a private pension, with employees obliged to pay a proportion of their income into company or other private schemes.
In January 2001, the "red-green" governing coalition of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/The Greens (Bündnis 90/Die Grünen) had used its majority in parliament (Bundestag) to push through the core of the planned reform (DE0101204F). However, several provisions, in particular those relating to the introduction of a new private branch of the pensions system, still required approval by the Federal Council. Although the governing coalition parties do not have a majority in the Federal Council, which consists of representatives from Germany's federal state governments, they finally succeeded in gaining support from coalition governments from a number of federal states, which also included parties which originally opposed the reform. The law is now due to come into force on 1 January 2002.
According to Walter Riester, the Minister for Labour, the central state will contribute DEM 20 billion in subsidies to help employees build up private pensions and this will especially benefit families with children. While employees can invest their funds freely in the financial markets, private pensions schemes must meet certain criteria before employees are eligible for state subsidies and tax exemptions. The most important criteria are that:
- investments are tied in until employees reach the age of 60;
- a lifelong, constant or increasing monthly pension payment must be guaranteed; and
- employees' total contributions must be guaranteed and protected from distraint (ie being seized by creditors).
To ensure that private pension providers meet these criteria, the government is to create a new agency which will license new private pension schemes. After a fierce debate, it was agreed that the new law will also provide limited opportunities to make investment in real estate by employees (as an alternative pension scheme) eligible for state subsidies. In addition, the new private branch of the pension system will support existing company-level pension schemes, including new types of pension funds which will be eligible for co-funding by the state. While such funds are fairly new - existing so far in the construction industry (DE0104216N) and at Volkswagen (DE0101200F) - there seems to be a growing interest in them. Thus, the Gesamtmetall metalworking employers' association and IG Metall metalworkers union have recently entered negotiations to establish an industry-wide pension fund. According to estimates by IG Metall, by 2010 the fund will hold assets worth DEM 50 billion and will thus make workers co-owners of parts of German industry.