There is one thing politicians and experts agree on: private old-age provisions are becoming ever more important – for without appropriate precautions, a broad section of the population will soon no longer be able to maintain their standard of living after retirement. Demographic changes and decreasing efficiency of the social security systems indicate an uncertain future. The current low interest level and a media landscape, which is not exactly in favour of provisions, cause further irritation among the citizens. Comprehensive information and awareness-raising initiatives are needed as urgently as the establishment of a stable regulatory framework. One thing is certain: the concept of life insurance as a key element of private old-age provisions, which has been tried and tested over generations, provides the highest level of security when it comes to long-term investments.
A stable lifelong income. The conception of private old-age provisions has changed among the population in light of the low-interest period and the national debt crisis. For three out of four German citizens (74 per cent), security is more important in their old-age provisions than rate of return (Allensbach survey conducted in 2011). Life insurance is the only instrument for private old-age provisions which provides security and, at the same time, meets the specific and individual needs regarding old-age provisions. Benefits guaranteed beforehand are a unique selling proposition. They are available at a specified time, for example when reaching retirement age, and provide the necessary lifelong income. The insured person benefits from the effect of compound interest. During the period of capital accumulation, life insurance additionally provides financial security for surviving partners as well as an insurance against incapacity for work.
The biometric risk, meaning the rather pleasant situation of reaching a higher age than the average population, is not taken into consideration in various alternative investment products. From this point of view, life insurance is the only investment product which is resistant to demographic developments. It offers a lifetime guarantee and ensures that the insured person receives at least the guaranteed benefit, regardless of the actual duration and lifetime. This is the essential element of old-age provisions that are worthy of their name. More than 94 million life insurance contracts in Germany document that the consumers share the same view and that life insurance represents the recognised form of private provision. Day after day, German life insurers distribute around EUR 230 million in form of capital payments or pensions – this amounts to about a third of the benefits of the statutory pension insurance (German Insurance Association (GDV) – Source: Die deutsche Lebensversicherung in Zahlen, 2012). Private old-age provisions play a decisive role in the overall old-age provisions.
Regulated, secured and transparent. The life insurance market is highly regulated and committed to the highest security standards. Mechanisms such as guaranteed actuarial interest rate, capital cover regulations since Solvency I, the rescue company Protektor or regulations of the German Financial Services Regulator (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin), provide a unique security on the financial market, which has been tried and proven over decades. There are few other products on the financial market that are capable of offering a comparable default guarantee. In contrast to how they are commonly perceived, life insurance products may be highly complex, yet they are becoming increasingly more transparent. This fact is reflected, for example, in the required participation rates of the policyholders in the results, the continuous improvement of the standard policy conditions and consumer information as well as in detailed specifications of the acquisition and administration costs in the product information sheets.
If securing the biometric risk and the guarantee are taken into account, life insurance proves to be strongly competitive – even in terms of return perspectives. Thus, the actual benefits paid by the life insurers, including profit participation, are always clearly above the guaranteed figures. Long-term comparisons have shown that the return on investment even surpasses the return of most equity funds, which fluctuate much more noticeably in terms of performance. From an economic and social perspective, this is a decisive argument in favour of life insurance. A long-term equalisation of results due to the investment product life insurance results in the problem that the individual time of retirement – boom or downturn – will not determine whether you have a large or only a small amount of money at your disposal.
Reduced willingness to make private provisions. The individual budget available for old-age provisions tends to be tight and is rivalled by the individual propensity to consume. The high level of consumer spending illustrates that low interest rates have a negative influence on the propensity to save. The savings ratio in Germany remains high by European standards, but it has been declining for years and currently amounts to approximately eleven per cent. Most consumers are surely aware of the fact that they need to make private old-age provisions if they want to maintain their standard of living after retirement. But as mentioned before, people are currently unsettled by the media and the national debt crisis and, therefore, are unwilling to enter into long-term financial commitments. The resulting fatalism concerning provisions contradicts the actual need of making private old-age provisions. However, the urgency of making additional provisions remains unchanged. The issue of old-age provisions is only postponed.
According to the Generali old-age survey, which we published in cooperation with the Institut für Demoskopie Allensbach in 2012, senior citizens are doing better than ever before. But this situation will not last – unless future pensioners start making private provisions to a larger extent than before. The product variants of life insurance provide some of the best opportunities within the framework of government-sponsored products such as Riester and basic pension or corporate pensions, enabling consumers to optimise their own financial expenses and the resulting income.
Alternative financial investments and returns. Only few private savers are likely to permanently achieve the return on investment of institutional investors. Life insurers, however, were continuously able to generate a return on investment above the money market interest rate. Thanks to the size of their portfolios, they can broaden and diversify their financial investments. In addition, life insurers have years of capital market experience and operate an established risk management system, which equally takes the opportunities and risks of financial investments into account. The current trend of declining returns on life insurances is the result of low long-term interest rates. Professional investors will not be able to escape this trend in the long run. Especially not if they factor in the money market interest rate as a reference for the necessary financial security of their investment. In contrast, life insurers have demonstrated their ability to limit losses and to react to crises in the capital markets due to their specific risk-averse investment strategies. At the peak of the financial crisis, not all institutional investors have succeeded in this regard. The current low-interest period, which is, above all, politically motivated, makes life very difficult for all investors – including the life insurers. This requires political action and the establishment of adequate conditions to raise the attractiveness of long-term financial investments in the future.
The author was born in 1951 and studied Mathematics and Business Administration in Hanover. Dietmar Meister started his professional career at Volksfürsorge Deutsche Lebensversicherung AG in 1980. In 1993, he joined Aachener und Münchener Beteiligungs-AG, which operates under name Generali Deutschland Holding AG since 2009. As of 2002, he is a member of the board of directors and chairman of the board since 2007..