The Organisation for Economic Co-operation and Development (OECD) has called for the introduction of mandatory asset-backed occupational pension schemes in Germany to strengthen social security and deepen capital markets.

Its OECD Economic Surveys: Germany 2025 report advised that such a reform would deepen capital markets, enhance social protection, and reduce financial vulnerabilities tied to Germany’s relatively low occupational pension assets - just 17 per cent of GDP in 2023, compared to an OECD average of around 50 per cent.

Despite over half of German workers being covered by occupational pensions, about 40 per cent of these pension liabilities rely on book reserves - firm-specific defined-benefit plans that are largely unfunded and not subject to financial supervision.

These book reserves, which account for roughly 12 per cent of GDP, pose significant risks for employees, especially in cases of company insolvency where pension claim recoveries are minimal.

The OECD highlighted that many companies favour book reserves due to tax advantages and lower regulatory burdens. However, these schemes often exhibit funding shortfalls and expose pension promises to the risk of firm failure, creating potential distortions in competition and weakening economic dynamism.

To address these issues, the OECD recommended introducing minimum funding requirements similar to those in the UK and US, alongside incentivising pension funds to increase their exposure to private assets and equities. German occupational pension funds currently lag behind European peers with only 10 per cent equity exposure.

Indeed, German occupational pension funds have underperformed those in the best-performing OECD countries over the past two decades, delivering an average annual real return of just 1.8 per cent.

This underperformance is largely attributed to their low equity exposure, which results from a combination of restrictive regulatory limits on investments in private assets and a conservative investment approach by pension fund managers.

For instance, the occupational pension scheme Pensionskassen faces investment caps of 35 per cent for equities, 25 per cent for real estate, 50 per cent for corporate bonds, and only 7.5 per cent for private investment funds. Additionally, limits on single-issuer instruments remain low across all private asset categories.

In contrast, countries such as Denmark, Sweden, Norway, and the Netherlands have adopted more flexible regulations. In these countries, where asset-backed pension funds have achieved real returns above the OECD average, the portfolio limits for private assets are often set at 100 per cent for direct investments or there are no specific restrictions, enabling greater allocation to higher-yielding asset classes.

Additional reforms highlighted in the report for Germany included improving the financial literacy of stakeholders, encouraging a shift from defined-benefit to defined-contribution pension schemes, and enhancing individual participation in funded pension plans through better incentives and standardised investment products.

Furthermore, the OECD said German insurers, managing assets equivalent to 50 per cent of GDP, could also play a larger role in financing innovative start-ups by increasing direct investments in private equity, an opportunity that regulatory revisions under Solvency II could unlock.

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