3 Responses to A German retirement saving system moves from insurance to investment

1. BenefitJack says:

   August 31, 2026 at 7.32

   How were the German insurers investing the assets? How will asset allocations (in the aggregate) change now that individuals will direct the investments?

   In the states, pension and individual account investment allocations do vary. Increasingly, more and more individual accounts are allocated to target date investments, including target date funds that limit allocations to passive index subaccount investments. https://www.ici.org/resource-hubs/target-retirement-date-funds

   Investment performance, comparing professionals investing defined benefit pensions with individuals investing defined contribution profit sharing and thrift/savings assets, varies based on numerous variables – plan type, plan size, and of course, investor/participant elections … https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3697711

   Was the cost of the insurance guarantee really as much as 300+ basis points (“… fees will be capped at one percent versus as much as four percent in total annual costs for existing Riester accounts…”)?

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   • Derek Scott says:

     August 31, 2026 at 7.32

     The German insurance industry’s 2025 average asset allocation was approximately:

     Bonds held through funds 30.7%

     Direct bonds/fixed-income securities 22.1%

     Loans 16.8%

     Participations/equity interests 12.2%

     Mortgages 6.9%

     Shares 4.6%

     Property 4.2%

     Other 2.3%

     …

     The existing Riester pension/insurance products bundle together several things: investment management; insurance guarantees; longevity/annuity arrangements; distribution and sales commissions; administration; acquisition costs; regulatory capital; and potentially other insurance protections.

     If the old system cost up to 4% and the new 2027 system (its standard product, anyway) is capped at 1%, there are potentially three quite different explanations:

     Excessive intermediation/profit/commission. Wasteful costs/leakage that should never have been there.
     The cost of providing guarantees and insurance. Legitimate costs that disappear in the comparison because the saver now bears the risks.
     A change in investment strategy. The new products can invest more aggressively because they don’t have to provide/protect a guaranteed outcome.

     The explanation is probably some combination of all three.

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     • BenefitJack says:

       August 31, 2026 at 7.32

       A pension system where only 12% of assets were allocated to equities? That may not be enough risk exposure for a 75 year old when anticipating future inflation.

       In the states, among private sector DB plans, because most of the large employer or jumbo employer plans have been frozen and because the majority of plan participants are either term vested or retired and already receiving benefits, private sector DB plans now allocate slightly more than 50% of their portfolios to fixed-income assets – as corporate plan sponsors prioritize liability-driven investing and de-risking.

       Over the past 50+ years:
       – The number of private sector DB plans has declined from a high of 175,000+ to 46,000+,
       – The number of participants has declined from 42+ million to 29+ million, however,
       – The number of active participants has declined from 30+ million to 11+ million.

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