Author: Andreas Pretzsch, Head of the Allowance Management Department, Product & Projects at msg life

Read the original German version here

Summary:

The draft bill for Germany’s reform of tax-subsidized private pension plans aims to transition private pension provision to a new system and open it up to new providers such as fund companies, banks, and neo-brokers. As part of the reform, a pension savings account and the “Early Start Pension” are to be introduced. The legislative process is nearly complete, and it is clear that while the reform offers significant potential for financial institutions, its complexity requires substantial technical and organizational preparations. Providers of retirement savings products should prepare early for new processes, certification requirements, and reporting obligations. With highly automated and scalable solutions, Germany’s pension reform can become a model for success.

Draft bill on the reform of government-subsidized private pension plans

At the end of 2025, the federal government adopted a draft bill to reform state-subsidized private pension plans, as well as key points for the introduction of the early retirement pension. The Bundestag approved the draft bill on March 27, 2026, and the Bundesrat is expected to vote on it in May 2026. The Pension Reform Act can then take effect as planned in early 2027. The goal is to create a cost-effective, simple, transparent, and easily understandable range of new pension products with higher potential returns. The draft bill provides for the introduction of a certified pension savings account eligible for subsidies. A new feature is that, in addition to traditional pension providers, various financial institutions such as fund companies, neobrokers, or banks will also be permitted to develop and offer accounts.

Tax-advantaged retirement savings account without guarantees

As has been the case to date, eligible insurance products with guarantees will continue to be available in the future, with retirement savers able to choose between a 100 percent or 80 percent guarantee. In addition, the draft bill provides for the introduction of an eligible and certified retirement savings account without guarantees, through which savers can invest in the capital market (ETFs, funds, etc.) over the long term. Each provider must also offer a standard account (standard product) that, in principle, can be opened without personal consultation. The standard account is a variant of the retirement savings contract in which the effective costs (sales commissions, administrative costs, fund costs) are capped at a maximum of 1 percent per year. Furthermore, only two funds may be included in the standard account. Unlike in the original draft, a state-organized standard account under public administration is now also planned. This is intended to ensure a transparent and cost-effective basic offering. The retirement savings account now also allows for flexible payout plans without a residual pension. Pension insurance in the traditional sense, on the other hand, is characterized by long terms and guaranteed benefits.

Can existing Riester pension plans be converted?

The reform of private pension provision (pAV) is intended to replace the unpopular Riester pension. It is considered to offer low returns, lack transparency, and be overly bureaucratic. According to the draft bill, existing Riester pension policyholders will be able to continue contributing to their current contracts or switch to the new model. There will be no automatic termination or conversion. The home ownership pension subsidy (Wohn-Riester) is to be retained. Existing contracts may continue or be transferred to the new system. The basic regulations regarding Wohn-Riester are not scheduled to take effect until January 1, 2028. For home equity withdrawals that have already taken place, the old law will continue to apply for reasons of protection of legitimate expectations.

Contribution-based funding instead of fixed allowances

In contrast to the fixed basic subsidy under the Riester pension, a simplified, contribution-based subsidy scheme is planned. The initially proposed fixed subsidy, calculated in cents per euro of savings, will now be replaced by a percentage-based subsidy. Accordingly, contributions of up to 360 euros per year will be supported by a government subsidy of 50 percent (up to a maximum of 180 euros). Pension contributions ranging from 360 euros to 1,800 euros will be subsidized at a rate of 25 percent (up to a maximum of 360 euros). Overall, this increases the maximum basic subsidy to 540 euros per year. The higher subsidy rate up to 360 euros is intended to encourage people with low and middle incomes to make private pension provisions. The child allowance is also paid in proportion to contributions: up to a personal contribution of 300 euros per year, there is 100 percent government support. Young people who make retirement provisions before the age of 25 receive a one-time starter allowance of 200 euros.

Inclusion of self-employed individuals

According to the bill, self-employed individuals will now also be eligible to participate in the new retirement plan. Until now, they were ineligible for subsidies due to the lack of mandatory insurance. Mandatory members of professional pension funds will also be included among those eligible for subsidies in the future.

What is early retirement?

In addition, the federal government has agreed on key points for a state-subsidized retirement savings program for children: the “Frühstart-Rente.” Under this plan, 10 euros per month will be deposited into an individual, funded, and privately managed retirement savings account for every child between the ages of 6 and 18 who attends an educational institution in Germany. Parents can open the Frühstart-Rente account with a provider of their choice. For children whose parents do not set up a Frühstart-Rente account, a fallback solution is to be provided. In this case, the Bundesbank will manage the monthly contributions.

Linking Early Retirement Benefits and Retirement Savings Accounts

The capital accumulated under the Early Start Pension program should be able to be seamlessly transferred to a subsidized private retirement savings account after the age of 18. The Early Start Pension is to be introduced in phases, beginning on January 1, 2027. Government subsidies are to be paid retroactively to January 1, 2026, initially only for those born in 2020. A new birth cohort is then to be added each year.

What is the timeline for implementing the Pension Reform Act?

• The legislative process is expected to be completed in 2026.
• The Pension Reform Act is scheduled to take effect on January 1, 2027.
• The Early Retirement Pension is scheduled to launch on January 1, 2027.
• Government subsidies are to be granted retroactively as of January 1, 2026, for children born in 2020.
• Tax regulations/changes regarding the Wohn-Riester pension plan will take effect on January 1, 2028

Great Opportunities for the Retirement Savings Industry

The “Early Start” pension holds enormous potential. It offers private retirement savings providers the opportunity to tap into a new target group comprising millions of children and young people and build long-term loyalty. At the same time, competitive pressure is also growing: in addition to insurers, banks, mutual fund companies, and neobrokers will also be able to offer accounts for the “Early Start” pension.

What challenges must be overcome in implementing retirement savings accounts and early-start pensions?

One thing is already clear, however: the implementation of retirement savings accounts and early-start pensions involves significant challenges. Providers will soon be faced with a large number of new contracts, which will require entirely new workflows and reporting processes. In addition, providers must undergo complex certification and approval processes in advance for their new retirement savings accounts and early-start pension contracts in order to receive government subsidies. And it must be ensured that existing Riester contracts, as well as Wohn-Riester contracts, can be converted to the new system.

Accordingly, systems, processes, and functionalities must be rebuilt or adapted. This primarily affects:

• benefit administration
• reporting
• tax inventory management
• documentation
• interface management

Read the original German version here