MNI INTERVIEW: German Pensions Model For EU Reform - Rocholl

Germany’s proposed EUR35-billion-a-year government-backed pension fund has the potential to accelerate integration of European Union capital markets, driving investment throughout the continent, a member of the special commission which recommended the changes to German Chancellor Friedrich Merz told MNI.

“I hope that the creation of capital-backed elements will have strong positive externalities for the rest of Europe, and that it will help bring about the closer integration of European capital markets, and strengthening of capital markets,” Joerg Rocholl said in an interview, as Germany’s CDU-SPD coalition government announced on July 2 that it would back all 33 recommendations from the independent expert commission on pension reforms in a parliamentary vote in coming months.

“Maybe the capital markets union will get a boost from this decision. It could even be that other countries might rethink their current pension policies, and use this as a moment in which Europe can deploy its strengths,” said Rocholl, president of ESMT Berlin business school and chair of the advisory board of the Federal Ministry of Finance, adding that Europe does not lack capital, but suffers from poor capital allocation.

The EUR35 billion a year of payroll contributions that will flow into the new public pension fund to be created under the reforms will be at arm’s length from political interference, he said. (See MNI INTERVIEW: EU Needs 'Credible Threat' Against China)

“My hope is that this money is channelled much more in the direction of growth and investment in the future - and I would say that it’s realistic to associate such developments with these reforms,” he said, noting that 40% of German savings are currently held in regular bank accounts.

FUNGIBILITY

“What I would hope for is a high level of fungibility and transparency, so that it’s possible to switch between funds in real time, with private options perhaps able to offer certain riskier options and asset classes. “

Possible future tax breaks for middle earners would add to the pot of money available for private investment, Rocholl said.

“Pension reform could be seen as a trigger point for - or giving moment to - the broader package of reforms that is needed to bring the economy back to growth,” he said, though he warned that the commission’s proposals could be watered down in parliament.

“The recommendations that we presented have to be seen as a package, because there are interdependencies between different recommendations, and these recommendations only come to full power if they're implemented together. Our report should not be seen as a buffet, where you pick this or you don't pick that.”

Still, Rocholl acknowledged criticisms that compelling individuals with so-called “mini-jobs” to make pension payments could lead to a reduction in part-time positions, while increased labour costs could negatively impact some self-employed workers, together with doubts over the progressive increase in the retirement age, saying these warrant careful discussion.

“We feel it's important also for them to have precautionary measures in place, and by allowing a three-year grace period it should not place too much of an immediate liquidity burden on individuals and companies,” he said. (See MNI INTERVIEW: ECB Rates Already Too High - Bofinger)

BOOST TO CONFIDENCE

“We also have a couple of measures in place that will bring down, or at least will dampen, the increase in labour costs, including the slower increase in pension payments and the gradual increase in the retirement age.”

A key effect of the changes will be to boost the confidence of the young in the future of the German pension fund, said Rocholl, citing positive feedback from ESMT students.

“That in turn makes it much easier for them to stay and build their professional lives in Germany, and to attract outside talent to Germany. So I see overarching value in this, as well,” he said.