Backing out of private pension provision - Lessons from Germany

Financing pensions in the EU is a challenge. Many EU countries introduced private pension schemes to compensate declining public pension levels due to reforms made necessary by demographic change. In 2001, Germany introduced the Riester pension. Ten years after introduction the prevalence rate of this voluntary private pension scheme approximates 37%. However, numerous criticisms raise doubts that the market for Riester products is transparent. Using the 2010 German SAVE survey, this paper investigates for the first time terminated and dormant Riester contracts on a household level. Respectively 14.5% and 12.5% of households who own or have owned a Riester contract terminated it or stopped paying contributions. We find that around 45% of terminated or dormant Riester contracts are caused at least partly by product-related reasons, which is significantly higher than for endowment life insurance contracts. Uptake of a new contract after a termination is more likely if termination is productrelated. Nevertheless, after a termination 73% of households do not sign a new contract, which can have serious long-term consequences for old-age income. Households with low income, low financial wealth or low pension literacy are more likely to have terminated or dormant contracts. Low income and low financial wealth households also have the lowest prevalence rate of Riester contracts and are at higher risk of old-age poverty.