It's obvious that something has to change in the way private retirement provision is supported. Making better use of the capital markets' return opportunities – that's long overdue. There are some hopeful signs of change, but you shouldn't wait for them.
The matter is actually clear. And has been for a long time. The gap between pensions and wages keeps growing. The reason is demographic change: more and more people are drawing a pension, while fewer and fewer are paying contributions into the pension fund. That's why the pension level is falling. Anyone who wants to maintain their standard of living in old age should make additional provision.
Attempts to significantly strengthen private retirement provision through government support have, however, largely failed so far. Excessive costs, high complexity, poor quality: experience with models like "Riester" has shown that for too many providers, it's all about selling highly commissioned products. As a result, the support misses the investment goal. This is also due to the standard guarantee promises. Guarantee products aren't just expensive. Guarantees also prevent the return opportunities of the equity markets from being used on a larger scale. "Yet these would help precisely those who are just starting to build wealth," emphasizes Martin Daut, CEO of quirion.
Doing without guarantees
This insight seems to be gradually spreading. In any case, it can now be found in several political programs. It is part of the proposal for retirement-provision accounts, for example, which was already debated in the Bundestag in December as an FDP draft bill. The core idea: within subsidized accounts, it should be possible to use the capital markets' return opportunities via ETFs, traditional funds and individual securities. There would be no guarantees.
The "early-start pension," a proposal from the CDU and CSU, likewise does without guarantees. The plan: for every child, 10 euros per month should be paid from age 6 to 18 into an individual, funded and privately organized retirement-provision account. The aim is to raise awareness of retirement provision and capital formation early on. The Greens, too, are betting on doing without guarantees and on the capital market in their proposal to replace the Riester pension with a publicly managed citizens' fund.
The SPD's election program contains nothing about making greater use of the capital markets for private retirement provision. But at least it proposes that government support for private retirement provision only be granted to new retirement-provision products whose costs are transparent and capped.
Making the most of time
Which proposals will be pursued further and what the details will ultimately look like is completely open. What's clear is that with a long-term investment horizon, a guarantee isn't really necessary. Because over time, fluctuations in value smooth out.
When building wealth over the long term, however, it's crucial that two conditions are met. First: "The portfolio should be efficient, meaning it avoids unnecessary costs," Daut underscores. He therefore considers a cap on the costs of eligible products very sensible. "The idea that competition alone will sort that out certainly didn't work with Riester. In large parts of the German financial industry, the interest in commissions is simply too great for that."
The second condition: "The portfolio should be systematically diversified, thereby ruling out unnecessary risks," Daut explains. It's not enough to encourage people to invest in just any stocks. "Anyone who simply speculates away exposes themselves to far too much risk. Those risks can be reduced considerably through diversification."
Aiming for the market return
Over the long term and on average, equity markets have always risen so far. That's because equities represent a stake in companies and thus in the economy. The economy, in turn, is geared toward growth. "That's a very fundamental relationship," Daut notes. However, it only holds for the market as a whole. "Individual companies can fail, industries can lose relevance, regions can end up in crisis for a long time."
A globally diversified portfolio taps, in a sense, into the growth of the world economy. In doing so, the portfolio aims for the average market return. Because over the long term, no one can reliably beat the market. Not even investment professionals like fund managers manage it. Even if they charge dearly for the promise.
Building wealth systematically
quirion's global portfolio shows how you can build wealth systematically with a diversified ETF portfolio. It's grounded in scientific findings. The goal is to optimize the balance between return opportunities and risks. The portfolio gives investors a stake in around 8,000 stocks from over 70 countries. For comparison: the MSCI World contains around 1,400 stocks from 23 countries. In addition, depending on the investor's risk profile, quirion mixes in bonds. This can cushion fluctuations in the value of the equity portion. The portfolio is also available as an ETF savings plan, starting from savings installments of 25 euros a month.
Making additional provision for old age with a global ETF portfolio like this makes sense in any case – with or without government support. "In any event, I wouldn't advise waiting for politics," Daut underscores. "The earlier you start, the better." Because the compound-interest effect is one of the most powerful levers in long-term investing.
A worked example: with a savings installment of 150 euros a month and an assumed return of five percent per year, you reach a total of around 10,200 euros after five years. About 90 percent comes from the contributions, only 10 percent from the return. With a savings period of 30 years, the wealth has more than tenfold and stands at around 123,000 euros. Over half of it is attributable to the return, or rather the compound-interest effect.
Anyone who wants to get a sense of whether their own financial strategy will actually reach the goal in the end – for example, a specific desired monthly amount in retirement – can find out with the q-Navigator in just a few steps.
