Germany bets on stock market to secure pension system amid ageing population

Faced with an ageing population and millions of baby boomers leaving the job market over the next few years, Germany hopes to stabilise its pension system with a Sweden-style sovereign wealth fund.

As of 2024, Germany intends to buy stocks from global capital markets with additional sovereign debt, in a bid to secure its pension system despite the demographic change.

In the coming years, millions of workers from the ‘baby boomer’ generation (born in the 1950s to mid-60s) will reach retirement age. In 2035, there will be 20 million people above the legal retirement age of 67, which is 4 million more than today, according to Germany’s national statistics office.

This will strain the country’s public pension system, which so far sees benefits mostly financed through contributions from the current workforce.

“More people are switching to the recipient side of the social security system,” German Finance Minister Christian Lindner said at an event on 11 December. “On the payer side, those who are confronted with the burden are currently facing an unclear future.”

“The federal government wants to act in this situation,” Lindner said, promoting the new sovereign wealth fund dubbed “generational capital” by his liberal FDP (Renew Europe).

Implementation of the fund will start in 2024, in which the government will put €12 billion into the new fund, which is set to increase over the coming years. By investing in global stock markets, the new fund is hoped to gain a positive return, which can relieve the pension system from the mid-2030s onwards.

Already today, the country is putting about €100 billion from its annual budget into the pension system, financing about a third of total benefits. This is expected to increase significantly over the next years, as the three-party government of Olaf Scholz (SPD/S&D) promised to keep both the levels of pensions and the contributions stable despite the demographic change.

Unlike the rest of the federal budget, which has seen some significant cuts to fill a hole in the country’s finances, neither the annual contributions to the pension system nor Lindner’s new fund have been affected by the country’s recent budget crisis.

The €12 billion for the “generational capital” will also not count towards the strict ‘debt brake’ set in the German constitution, Lindner stressed, as the additional borrowing was offset “with the fixed assets in which we want to invest”, he said.

Role model Sweden

As a role model, the government sees the Swedish pension system, where the sovereign wealth fund “AP7”, set up in 2000 and functioning as the default option for Swedish workers’ pensions, was able to generate an average yearly return of 11%.

Like the Swedish fund, which only invests 1% of its money in Sweden itself, Germany’s new fund would make use of the fact that there is higher economic growth expected outside Germany than within the country itself, by investing in global markets.

“With potential growth of less than 1%, which we currently have or expect to have, it is also wise to participate in the development in the regions where potential growth is higher, which means having a broader global base,” Florian Toncar (FDP), state secretary in Lindner’s ministry, said.

Experts remain sceptical as to whether the Swedish model can be copied.

“The main reason for the high return on the Sweden default fund is that the fund is highly leveraged, and a lot of people raise their eyebrows about that,” Nick Barr, Professor at the London School of Economics, told Euractiv.

“Basically it’s high return because high risk,” he added.

Speaking in Berlin, Richard Gröttheim, former CEO of AP7, highlighted the fund’s long-term orientation and risk spread. 

“By investing in risky assets, you give a better return, and you create a better system for the pensioners in the long run,” he said. The fund’s portfolio would also consist of more than 3000 stocks, he stressed.

“The keywords are diversification and global holdings,” he said.

Independence

AP7’s Gröttheim stressed the importance of the fund in making decisions independent of political influence, because “it’s tempting for politicians to interrupt in the investments”.

When they were in government, representatives from the Swedish Green Party had called upon on the fund to put money into green investments. “But that’s our decision,” he said.

This was echoed by Anja Mikus, who currently manages Germany’s €24 billion state-owned fund KenFo, which is meant to finance the country’s nuclear waste disposal. Mikus will also be tasked with managing the new fund.

“Politically, there are always desires, or may I say necessities, when such a pot is available,” Mikus said. “But for us it is simple: the return target is the goal that the KenFo has and this must be pursued.”

For Barr, however, there is nothing wrong with setting political objectives, as long as politicians stay out of the fund’s day-to-day business.

“The sovereign wealth fund should have strategic objectives set out by the legislature. My personal view is that those objectives should include the green transition,” he said. 

“But then which green companies the fund buys should be a matter for the fund managers, not for German politicians,” he added.

[Edited by János Allenbach-Ammann/Nathalie Weatherald]

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