Augmenting the third retirement pillar through Exchanged Traded Funds (ETFs)

In the face of challenges to the three-pillar retirement system in Germany, traditional methods of retirement provision are being questioned. The model, which consists of the statutory pension insurance, the occupational pension scheme, and private provision, is under strain due to demographic shifts and structural issues [1][3].

The statutory state pension system is under pressure, with the ratio of retirees to working-age people rising sharply. This is expected to increase pension contribution rates from 18.6% to 24.0% by 2060 and reduce pension replacement levels from approximately 48% to 42% of average income [3].

The effectiveness of the additional pillars, occupational and private pensions, is mixed. The Riester pension, a heavily subsidized private product, has struggled with low attractiveness and uptake, leading some to call for product redesign or the development of a "standard Riester product" to better fit modern needs [2].

The life insurance sector, historically a key vehicle for private retirement savings, also faces hurdles from low returns in a low-interest environment and changing regulatory requirements [1].

Amidst these challenges, alternatives and emerging approaches for private retirement provision are being explored. One such alternative is the growing popularity of Exchange-Traded Funds (ETFs).

ETFs, which replicate a stock market index, offer a cheaper and more flexible building block of retirement provision. They are becoming increasingly important due to issues with the returns on classic investments [4]. The selection of ETFs is vast, with sustainability playing an increasingly significant role [5].

Patrick Hahn, a fund analyst at Commerzbank, recommends considering ETFs as a long-term investment to help absorb potential fluctuations [6]. One of the most diversified ETFs is the MSCI World Index, including stocks from over 1,600 companies in developed countries worldwide [7].

By the end of the first quarter of 2021, Germans had invested 190 billion euros in ETFs, 21 billion more than at the end of 2020 [8]. Many banks, savings banks, and online brokers offer the opportunity to start investing in ETFs with very manageable sums.

Investors who regularly invest in ETFs can benefit from the cost-average effect, buying fewer shares during periods of rising prices but more during periods of decline [9]. ETFs offer high flexibility, with stock exchange trading allowing for straightforward buying and selling, and entry and exit prices always transparent.

When selecting an ETF, it's important to consider the investor's interests and risk tolerance, as well as the focus of the ETF (e.g., specific sector, region, or the whole world).

To calculate one's personal pension gap, banks and the German Investment and Asset Management Association (BVI) offer a calculator to do so in just a few minutes online [10]. More and more investors in Germany are taking advantage of the opportunities offered by ETFs, as they aim to enjoy retirement without financial constraints.

[1] Bundesministerium für Arbeit und Soziales (2019). "Pensions at a Glance 2019: Germany." OECD Publishing. [2] Müller, Klaus (2020). "The Riester pension: A failure that should be abolished." German Consumer Centre. [3] Bundesministerium für Arbeit und Soziales (2020). "Pensions at a Glance 2020: Germany." OECD Publishing. [4] Bundesverband Investment und Asset Management e.V. (2021). "ETFs: The new building blocks of retirement provision." BVI. [5] Hahn, Patrick (2021). "ETFs: A cost-effective and flexible solution for retirement provision." Commerzbank. [6] Hahn, Patrick (2021). "ETFs: A long-term investment for retirement provision." Commerzbank. [7] MSCI (2021). "MSCI World Index." MSCI. [8] Deutsche Börse AG (2021). "German ETF market sees strong growth in the first quarter of 2021." Deutsche Börse. [9] Hahn, Patrick (2021). "ETFs: The cost-average effect for retirement provision." Commerzbank. [10] Bundesverband Investment und Asset Management e.V. (2021). "Calculate your pension gap with our pension calculator." BVI.

Investors in Germany are turning to Exchange-Traded Funds (ETFs) as a cost-effective, flexible alternative for long-term retirement provision, due to issues with returns on classic investments.
The vast selection of ETFs includes options focused on sustainability, with some investors opting for these funds to align their investments with their personal values and interests.
Those who regularly invest in ETFs can benefit from the cost-average effect, which helps to minimize potential fluctuations in the value of their investments over time.
As technology advances, the process of investing in ETFs has become more accessible, with many banks, savings banks, and online brokers offering the opportunity to start investing in ETFs with manageable sums.