The Era of State Pension Schemes is Over, Quo Vadis?

This short but very timely article is by Christian Eck, Head of Insurance – Equities and Cross Asset Solutions at BNP Paribas Corporate & Institutional Banking Germany. It raises the fundamental point that the era of State pensions is pretty much over in Western Europe. What can replace it however? Big questions ahead for politicians and insurers alike.

For some time now, Bafin has been placing a strong focus on the consumer perspective under the keyword “Value for Money”. This ignores the fact that life insurers must also follow the insurance principle, namely the benefit in the collective. However, high pressure on product design does not ensure a willingness to innovate.

It is obvious that the state pension systems have reached their limits. That is why the German government has been working on new concepts for a long time. But more personal responsibility and private provision are also needed to avoid poverty in old age. In this situation, massive regulation and restrictions on private systems would be the wrong way to go.

The topic of “Value for Money” lies on the borderline between competition, which should provide customer benefit or a good price-performance ratio, and profitability, which determines what companies (including distributors) can implement with a positive margin. The focus is on the cost side, while the benefit is actually decisive for the choice of product. First and foremost, prevention is about effectiveness and individual fit. Only then does cost optimization begin. Here, the industry should differentiate more strongly and make the advantages of customer-oriented designs clearer .

The planned pension reform is progressing only slowly. Here, too, legally defined pension plans have little potential for innovation, even if some leeway is created in the guarantee obligations.

The fact is that flexible pension concepts are needed that can react quickly to market changes. And it’s not as if the financial sector – banks as well as insurers – doesn’t have any solutions. There is enormous potential in the combination of insurance principles on the one hand and capital market models on the other. What is needed for this is freedom under framework conditions that guide but do not captivate.