German employers should monitor the progress of the country’s recently proposed reforms to its state pension, WTW has argued.

A blog post from the company stated that employers should look at the proposals and evaluate how the continuation of the 48 per cent targeted income replacement rate for state retirement benefits affects the attractiveness of supplemental pension plans offered to employees.

The proposals will see the creation of a sovereign wealth fund called Generationenkapital from €12bn of government funding in order to invest for the long-term in global capital markets.

The aim is, by 2036, to have accumulated €200bn in the fund, which will then partly be used to finance pensions in payment. The overall aim is for the fund to contribute €10bn annually on average over the long term.

The 48 per cent referred to by WTW relates to the targeted income replacement rate for state retirement benefits. The aim is for this to be met until at least 2039 for full-career participants whose earnings match the national average.

WTW wrote: “In 2035, the government would be required to submit a proposal on what additional measures, if any, may be necessary to maintain the 48 per cent level beyond 2039.”

The proposals also put forward that the current total employer and employee contribution rate of 18.6 per cent of covered earnings would increase to 20 per cent in 2028 and to 22.3 per cent in 2035.

WTW wrote about the pushback to the potential bills, stating: “Opposition to the proposed reforms is based in part on the higher contribution requirements and the uncertainty of relying on investment returns to provide funding consistently at the level projected.

“In addition, the projected €10 billion of annual funding from Generations Capital to the pension system would be modest relative even to the current level of state pensions in payment (about €300 billion in 2023), let alone future payments.”

The reforms have been controversial since first proposed and there has been criticism over the reforms, given the financial onus they will place on younger generations.

Later work done by the German Economic Institute, posited that the country’s statutory pension scheme will provide less pension provision despite increasingly higher contributions as the population ages. Fear over pension provision is also one reason why many feel there has been a bump in voluntary payments in recent months.

In a report, the institute said an increase in the retirement age could slow the process but that this would be unpopular with a population wanting a constant level of pension benefits and an unchanged retirement age.

According to the Federal Ministry of Labour and Social Affairs, proceeding without the package would lead to the average pension soon being worth only 48 per cent of the average wage, falling to 45 per cent in the long term.

Also included within the package was a proposal to raise the contribution rate from 18.6 per cent today to 20 per cent in 2028, then to 22.3 per cent from 2035 to 2045.

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