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Article | Global News Briefs

Germany: Proposal for a sovereign wealth fund to finance state pensions

By Dr. Uwe Schätzlein | June 24, 2024

A proposed sovereign wealth fund is aimed at generating long-term funding for the German pension system and partially tempering future contribution increases for employers and employees.
Retirement|Health and Benefits|Ukupne nagrade

Employer Action Code: Monitor

The federal government has published proposed reforms for financing the state pension system, the “Pension Package II” (Rentenpaket II). The proposal aims to maintain the targeted level of state pension benefits and to limit longer-term increases in employer and employee contributions to the system, in the context of an aging population and increasing expenditures on pensions. The proposal is centered on establishing a long-term sovereign wealth fund to generate funding for the state pension system.

Key details

Following are main elements of the Pension Package II:

  • A sovereign wealth fund, Generations Capital (Generationenkapital), would be established with annual loans of 12 billion euros from the government, to invest for the long term in global capital markets. The aim is to accumulate €200 billion in the sovereign wealth fund by 2036, when portions of returns on investments will start to be used to partially finance pensions in payment. The goal is for the fund to contribute €10 billion annually on average over the long term.
  • The current total employer and employee contribution rate of 18.6% of covered earnings would increase to 20.0% in 2028 and to 22.3% in 2035. Provided the Generations Capital fund meets profitability expectations, employer and employee contribution rates would not increase further, at least not before 2045.
  • The lower level of the existing sustainability reserve (Nachhaltigkeitsrücklage) would be raised from 0.2% to 0.3% of monthly expenditures of German Pension Insurance (Deutsche Rentenversicherung). The reserve guarantees the liquidity of the pension fund in case of unexpected fluctuations in contributions and pensions in payment.
  • The targeted income replacement rate for state retirement benefits would be maintained, until at least 2039, at 48% for full-career participants whose earnings match the national average. In 2035, the government would be required to submit a proposal on what additional measures, if any, may be necessary to maintain the 48% level beyond 2039.

Employer implications

Reform of the state pension system has been on the government’s agenda for over two and a half years, delayed by disagreements within the coalition government on how best to ensure the system’s sustainability. Opposition to the proposed reforms is based in part on the higher contribution requirements and the uncertainty of relying on investment returns to provide funding consistently at the level projected. In addition, the projected €10 billion of annual funding from Generations Capital to the pension system would be modest relative even to the current level of state pensions in payment (about €300 billion in 2023), let alone future payments. Employers should monitor the progress of the reforms and evaluate how the continuation of the 48% targeted income replacement rate for state retirement benefits affects the attractiveness of supplemental pension plans offered to employees.


Dr. Uwe Schätzlein
Associate, Retirement
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