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Private Insurance and Old Age Provision in Germany

Private Insurance and Old Age Provision in Germany. Peter Schwark, GDV Head of Department Social Policy and Pension funds. Outline. The Life Insurance Market in Germany The German Statutory Pension System Reform projects in the pension field Conclusion.

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Private Insurance and Old Age Provision in Germany

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  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 2002Premiums 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-Households 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, Alterssicherungsbericht2001

  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 until1990 West-Germany, since 1991 Germany Source: VDR

  18. 2050 2025 1997 110 110 110 100 100 100 90 90 90 80 80 80 70 70 70 60 60 60 50 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 0 0 1.000.000 500.000 0 1.000.000 500.000 0 500.000 1.000.000 1.000.000 500.000 0 500.000 1.000.000 500.000 1.000.000 men (new Länder) men (old Länder) women (new Länder) women (old Länder) 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. Pension-Reform I: Reducing Public Pensions SGB 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) => 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 orwithdrawal 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

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