The German Federal Ministry of Finance has published its long-awaited draft bill to reform the private pension system, which is intended to provide more opportunity, flexibility and transparency with new subsidized pension provision products.

The Ministry said that the law aims to “fundamentally reform” tax-supported private pension provision, in order to offer a cost-effective, simple, transparent and easily explained range of new private pension products.

These products are intended to appeal to a broad section of the population, with hopes this will encourage more people to invest in private pension provision to secure their standard of living in old age.

The changes also aim to enable these products to deliver higher returns in the savings phase, following updates to the criteria that previously applied to the certification of a pension contract.

In particular, the draft bill confirmed that, in addition to the security-oriented guaranteed products with guaranteed capital, an eligible and certified pension deposit without a guarantee will be permitted, within the framework of which it is possible to invest in funds, as well as in other asset classes suitable for small investors.

The retirement savings account without a guarantee will aim to provide a new, high-yield and cost-effective pension option with more potential for returns.

However, security-conscious savers will still be able to choose a guaranteed product, with two guarantee levels: 80 or 100 per cent.

In addition to this, the various offers will be required to be easy to compare using a free online platform in order to make better pension decisions.

The bill is also expected to make retirement savings more attractive from a tax perspective, as whilst currently a maximum of €2,100 can be invested tax-privileged in the Riester retirement plan each year, the draft bill would increase this to €3000, rising further to €3,500 from 2030.

For each child, the allowance increases by a further 25 cents per euro saved, with a maximum of 300 euros paid per child.

Pensioners with low incomes and those starting out in the job market are also set to be supported with fixed increases.

Furthermore, the Ministry said that the incentive for young people to make provisions for their old age will also be even greater in the future.

The main parts of the reform are to apply from January 1, 2026.

The draft bill was welcomed by German Stock Institute, which said it is in favour of the “rapid implementation” of the proposals.

"The draft bill is an important step towards more attractive private pension provision with shares,” German Stock Exchange Institute managing director, Henriette Peucker, said.

“Many countries have been successfully using pension accounts with a high share for years. In Australia, for example, pension accounts with a share of around 50 per cent generated returns of an average of 7.1 percent per year from 2004 to 2023.”

However, the group argued that whilst the planned increases in tax-exemptions is a step in the right direction, it does not compensate for inflation.

It also pointed out that other countries are much more generous, with the USA for instance, having a deductible amount of USD 6,500.

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