The German Government has presented a package of measures to guarantee the sustainability of the pension system (based on pay-as-you-go structure) and ensure a replacement rate of at least 48% in the future. One of the measures includes the creation of a fund, whose endowment is expected to reach EUR 200 billion, which will invest in the markets and which from the middle of the next decade will contribute to supporting the financing of German pensions.

The project for the creation of ‘Generation Capital’, presented by the Minister of Labor, Hubertus Heil, and the head of Finance, Christian Lindner, contemplates the financing of the fund through loans from the federal budget and the transfer of the Government’s own funds to constitute a social capital, the income of which will contribute in the future to stabilizing pension insurance contributions. In this sense, loans amounting to EUR 12 billion are contemplated in 2024, with an annual increase of 3%, and the disposal until 2028 of federal assets worth EUR 15 billion, with a view to reaching a share capital of EUR 200 billion.

The sovereign wealth fund is to be professionally managed and invested globally through a newly created independent public foundation, whose board will decide on the investment of the funds within the framework of a federal investment guideline. For its establishment, the operational structures of the Nuclear Waste Management Financing Fund (KENFO) will be used until the end of 2026, as an already established public asset manager.

“To give the pension system a future, we created Generationenkapital. We believe this will cause a true paradigm shift. We should take advantage of the opportunities that the capital markets offer us for mandatory pension insurance for a long time,” said Lindner.

The Ministry of Finance emphasizes that the new fund represents a capital investment by the federal government to stabilize contribution rates. To this he added that investments in the markets aim to generate income to alleviate the evolution of contribution rates, thus benefiting taxpayers by slowing the increase in pension contributions in the future than would be the case without the fund income. In this sense, he explains that the investment vehicle aims to invest the funds made available to it in the market “in a profitability-oriented and globally diversified manner,” adding that, with regard to federal loans, it will take advantage of the difference in performance between investments in the capital market and lower interest federal securities. Likewise, it has indicated that “only from 2036 will distributions be made to pension insurance” for an expected average annual amount of about EUR 10 billion to stabilize pension insurance contributions, specifying that in 2029 a review will be carried out to analyze market developments and the probability of achieving profit targets and, if not, propose countermeasures. According to Berlin calculations, the pension insurance contribution will increase from the current 18.6% to 22.3% by 20235, due to the aging of the population. In this sense, the Government warns that without the expected contribution of this investment vehicle, the contribution rate would be around 23% by 2045.

Source: BíoBío Chile

Date: 05.03.2024