Written by 17:00 Financial Centre, Member

DVFA monthly question: Generational capital is generally welcomed

In the latest monthly question, DVFA Investment Professionals were asked what they think of the German government’s pension package and the “generational capital” it contains to support state pension funding. “Of course, the longest journey begins with the first step. For many investment experts, however, the discussion about funded pension provision feels about as old as this proverb by Lao Tzu,” says Roger Peeters, CEO of DVFA, describing the results of the survey. “‘Too late, too little’ was the tenor of many of the comments we received. On the other hand, the opinion clearly prevailed that the start that has finally been made is more important than the individual criticism of the concept.”

Good approach, but more needs to be done

In any case, the answer to the question about the overall assessment is clear: “The idea is good. However, it can only be a tentative start. Significant contributions must be transferred to the funded system after the next election at the latest.” A record-breaking 95.5% of survey participants agreed with this proposed answer.

 

Debt financing meets with little approval

However, the comments of many participants express skepticism about the extensive debt financing of the generation capital and the associated lower returns. Almost three out of four of the responding investment professionals (73%) consider it a good proposal that the federal government should also contribute its own assets, for example in the form of company investments, to the new fund in the amount of EUR 15 billion by 2028. After all, with equity, the federal government has “skin in the game”, so to speak. In contrast, around one in eight (13%) view this critically. And just under 15 percent have not yet reached a verdict.

 

Volume should be significantly increased

When asked what else should be changed in the concept, half of the responses were in favor of significantly increasing the volume of generational capital as soon as possible. One in five respondents (22%) was against credit financing of share purchases in the new fund. Instead, the federal government should take the funds from the existing budget. And more than one in four respondents called for civil servants and the self-employed to also pay into the pension fund (28%).

Some of the participants’ comments criticize the fact that a state-financed, capital-based pension plan can no longer solve the demographic problem at the present time. It is simply too late. At the same time, however, the intergenerational contract no longer works. This makes it all the more important to encourage people to take responsibility for their own pension provision, for example with tax advantages, such as those offered by Australian or US models (401k plans).

Broad diversification of investments important

Opinions also differed relatively little on investment guidelines: well over half of respondents (57%) were in favor of “investing capital in a broadly diversified manner at low cost, worldwide and in all possible segments and sectors”. However, almost 18% want ESG principles to be adhered to. Almost as many (17%) took the opposite view, saying it was “about returns, nothing else”. The comments on these questions also dealt with the controversial issue of whether and to what extent German companies should be given preference in investments, in the interests of the location and the German economy as a whole. However, only around one in twenty of those surveyed were in favor of this (6%).

“On this topic, it is probably clear to everyone that the generational capital financed with debt and some equity investments by the federal government is only a first compromise. And that the planned 200 billion euros will hardly be enough to stabilize pension levels and contribution rates in the long term,” Roger Peeters summarizes the result of the monthly question as follows “Above all, it does not replace the actual, privately financed equity pension. This is because individual pension contributions would have to be used for equally individual, funded pension entitlements. Unfortunately, the government has yet to launch a broad public awareness campaign. The reflexive and false polemic against so-called “casino and gambler pensions” should finally stop

Source: DVFA Monatsfrage April, automated translation
Image: Khongtham via stock.adobe.com

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