“The lost investment generation - ways out of state failure”

Ali Masarwah, fund analyst and managing director of the financial services provider envestor, writes about why the failure of the Riester reform is just another chapter in a long-standing and blatant government failure and what lessons investors should learn for themselves and their pensions.

2 December 2024 FRANKFURT (envestor). The fairy tale of the three brothers, recorded by the Brothers Grimm and published in 1815, has a happy ending. Three brothers go out into the world to make their fortune. They return with different talents. Only the most capable is to be rewarded with their father's inheritance, but because the three brothers stick together, they all find a fair path to happiness.

At the beginning of the 21st century, three investors set out into the world with the aim of putting their private pension provision on a secure footing. One of them ended up with a unit-linked pension insurance policy. However, this only made the distributor rich and yielded such meagre returns that the investor threw in the towel and canceled, which turned it into a loss-making business due to the cancellation fees. The second investor took out a Riester pension for herself and her children because of the allowances. Due to the high costs and mini-interest rates, this yielded nothing. After talking to a reputable financial advisor, the investor decided to let the contract lapse. Now, a generation later, she is back to square one. The third investor was not comfortable with the situation and did ... nothing. Because of the many media reports about the failure of the Riester pension and horror stories from friends, he feels confirmed in his view that greedy product providers and exorbitant distributors only want to take money out of his pocket.

We don't know what the three investors will choose in the future when it comes to pensions, but we can say one thing for sure: the clock is ticking, the three belong to a lost generation that doesn't have much time left until retirement. We are now turning the page from the fictional story to the reality of investors in Germany. Investors, what to do?

The traffic light government's plans to reform private pension provision have made me optimistic in the meantime that the state could at least make a rudimentary effort to help millions of people in this country achieve better retirement provision. Generous subsidy rules, an end to the unspeakable Riester guarantees, the portability of old contracts into a new “pension portfolio” - all this seemed to make it possible to repair millions of Riester contracts. At five to twelve, but still. But with the failure of the “traffic light”, these plans are also a waste of time. This does not strengthen citizens' confidence in the state's reform efforts and should be the final wake-up call for investors to take their pension provision into their own hands. Five simple rules for the start of the new responsibility:

1. create awareness

Before you start, it is very important to internalize that it is never too late. If you only start making provisions in your mid or late 40s or even later, you still have time to build up assets. Keep your head up and roll up your sleeves - your financial health is at stake!

2. inform yourself and show interest

Are you racking your brains over the Christmas period and spending a lot of time on presents for your loved ones? Think about yourself too, give yourself the gift of an hour three times a week and take the time after Christmas to get an overview of the various options for retirement provision and the opportunities on the capital markets. Use various sources such as books by reputable experts (no crash prophets!), professional financial portals and publications from consumer protection organizations. The more you research the topic, the better you will be able to make informed decisions.

3. weigh up advice vs. self-decision

If you enjoy investing, you should take retirement provision into your own hands. Many financial portals and reputable media and bloggers offer plenty of information. If, on the other hand, you are not comfortable with the topic of finance, you should seek professional advice. It is essential that your trusted advisor is independent and transparent and gives you access to the entire market of funds and ETFs. Salespeople tied to banks or insurance companies are not neutral, let alone independent.

4. reduce costs

Regardless of whether you make your own decisions or seek advice: Pay attention to the costs when choosing pension products. High fees reduce the return - guaranteed! ETFs and low-cost funds are the products of choice. Ban products with guarantees from your portfolio: insurance policies can hedge risks, but they are generally unable to invest cost-efficiently for you due to high product and distribution costs.

5. Regular review and adjustment

View your retirement provision as an ongoing process. Review your strategy regularly, especially in the event of major life changes such as changing jobs or starting a family. Invest for the long term, but remain flexible and ready to adjust your pension strategy if your circumstances or market conditions change. Strike a balance between diversification and focusing on the essentials. If you have more than 15 funds and ETFs in your portfolio, this should raise questions. Too many products are just as detrimental to the efficiency of the investment process as too much concentration.