Prof. Dr. h.c. Karlheinz Hornung: Stocks in light of future demands on social security


Unfortunately, statutory pensions in Ger­­many are not quite as secure as the for­­mer Federal Minister of Labour Norbert Blüm once promised. The demographic change is the weak spot of the statutory assessment system. Increasing life ex­­pectancy and low birth rates are chang­­ing the ratio of those who contribute and those who receive payments from the statutory pension insurance. In an extreme case, every contributor will have to finance one pensioner in just a few dec­­ades, which would clearly be too great of a burden on the assessment system.

In light of this development, it is becom­ing increasingly important to make pri­­vate old age provisions in addition to the statutory pension. Owning stock is one investment option suitable for this purpose, which over the long term offers a considerably higher rate of return po­­­ten­­tial, in particular when compared to fixed-interest securities. The Stock Re­­­turn Triangle of the Deutsche Aktien­institut, which reflects the rate of re­­turn on stocks of German blue chip companies from 1955 to today, shows an an­­nual average rate of return of nine per cent for a ten-year investment horizon. This represents an annual return ad­­vantage of two percentage points compared to government securities. There­­fore, thanks to the compound interest effect for reinvestments, stocks provide a significantly higher final wealth based on the identical savings performance – in the long period characteristic of old-age provisions, the share price fluctuations, which in the short-term characterise the picture of a stock, average out.

However, the willingness of German pri­­vate investors to invest in stocks, de­s­­pite these advantages, is low when com­­pared internationally. According to data collected by the Deutsche Aktien­institut, the number of German shareholders and equity fund holders to­­talled 9.5 million in 2012 – this represents 14.7 per cent of the population aged 14 and older. And while this figure does not explicitly include the almost three million savers who regularly contribute to an investment fund for the so-called Riester Rente, the percentage of shareholders is considerably higher in other countries. In the USA, for ex­­ample, every second citizen invests in stocks directly or through fund savings


But why is it that Germans are not keen on being shareholders and why stocks correspondingly play a minor role in pri­­vate old-age provisions.

One reason is certainly the mentality of German private investors who prefer conservative savings options, which is also reflected in the asset and wealth structure. In 2012, 40 per cent of private wealth was invested in cash and deposits and an additional 30 per cent was invested in insurances. Stocks play a minor role with five per cent. Germans expanded their stock holdings to nearly 15 per cent around the turn of the millennium, in parallel with the boom in the new market. However, the bursting of the “dotcom bubble” was accompanied by a downright exodus of investors from stocks, a development again inten­­sified by the sub-prime crisis in 2008.

Unfortunately, the experience gained on the new market resulted in many invest­­ors refusing to return to the stock mar­­­ket. This despite the fact that stocks are relatively easy instruments, whose risks are manageable by following a few basic rules. This primarily includes an analysis of the feasibility of a company’s business model. In addition, one should not “put all eggs in one basket”. A broad diversi­­fication is the guiding principle for every responsible stock investment.

With this backdrop, the economic and especially the general knowledge of fi­­nancial principles regarding the basic principles of investment and asset formation is essential. The goal of all meas­­ures to improve the economic education must target the responsible investor, who can employ his/her product competence to sensibly and critically use the information provided by issuers and intermediaries. This would also make excessive rules for investor protection superfluous, which offer little benefit, but harm stock investment.


One example of such rules is the obliga­­tion banks must adhere to since the sum­­mer of 2011, which states that customer advice involving a purchase recommen­dation must include making a product information sheet available for each individual stock. This instruction leaflet is intended to briefly and comprehensibly explain to the private investor how a financial product works. As meaningful a product information sheet is for complex investment products, so significant is the damage to stock investment.

A study by the Deutsche Aktieninstitut shows that the obligation to create a prod­­uct information sheet for each individual stock has forced numerous banks out of the stock consulting business. Almost every second bank in Germany has re­­duced their scope of stock consulting; nearly 15 per cent of the survey partici­­pants stated that they have discontinued their stock consulting all together. The time and expense required for providing product information sheets for individual stocks is apparently disproportionately high, in particular for smaller banking institutions, whose customer base is relatively small. For this reason, nearly every fourth bank with a balance sheet total of up to 500 million euros can no longer recommend stocks. This considerably restricts their customers’ investment universe. This is not investor protection, but rather a limitation of choic­es offered to investors.

Revising the regulations regarding the product information sheet is thus ur­­gently required in order to stop the ex­­odus of banks from stock consultancy. Individual stocks should be fully exempt from this requirement. A product information sheet on stocks as an investment form would be factually sufficient. Otherwise, many banks will be unable to fulfil their obligation of providing their customers with an overview of all serious investment forms as part of an investment counselling. This includes providing information on stocks as an instrument for private old-age provisions and clarifying the basic rules on dealing with this investment form. In addition, mean­­ingful analyst reports are available on the Internet or in printed form for nearly every stock.

An additional regulatory obstacle for stock investment is the double taxation of stock earnings, which was significantly intensified with the introduction of the flat rate withholding tax in 2009. After 30 euros in corporate income tax and excise tax have to be paid to the revenue au­­thorities for every 100 euros profit on cor­­porate level, an additional flat rate withholding tax on the remaining 70 euros on the investor side is due, in ad­­dition to the solidarity tax and, possibly, church tax. Thus, the total tax burden on stock earnings totals nearly 50 per cent. In contrast, income from borrowed capital, instant-access savings accounts, savings books or pension funds only to­­tals about 28 per cent.

In an asset policy in which stocks are to play a more important role as an instru­ment for private old-age provision, stocks and fixed-interest securities must be equally taxed. As compensation for the double taxation, a half-income assessment method was in place through the end of 2008 and capital gains on stocks held for twelve months were tax-free. An alternative suitable for the system of flat rate withholding tax would be – at least in part – tax exemption at investor level. This would neither constitute a sub­­sidy nor a privilege, but rather a reduction of an existing and unjustified detriment to stock investment. The Deutsche Aktieninstitut has already submitted spe­­cific proposals on this matter.

Employee shares would be an addition­al instrument in an asset policy, which, however, is still insufficiently used in Ger­­many. The amount of the tax-related as­­sistance must be considered as be­­ing merely symbolic. A significant increase in the non-assessable rebate, for example on 1,000 euros annually, would not only be a meaningful measure, but also a long overdue one.

Lastly, the system of company pension schemes must also open itself to the capital market to a greater extent. After all, the pension obligations of the companies listed on the DAX equal about 310 billion euros. These claims are de­­picted to a large extent as provisions in the corporate balance sheets. If these provisions were increasingly transferred to external capital market participants, such as pension funds or life insurance companies, then these funds could be invested in stocks to a larger degree and thus provide an impetus to the entire stock market. However, the willingness of institutional investors to invest in stocks depends heavily on the institutional conditions. For example, the danger exists that the relatively high risk weighting for stocks in the standardised approach of Solvency II will diminish the attractiveness of stock investment for insurance companies.

Currently, stock and capital markets are regarded by government and society as being more of a problem rather than a solution. This is incorrect and damag­ing. Stocks in particular can contribute as long-term oriented and profitable tan­­gible asset investment to solving socio-economic problems, such as the challenges posed to old-age provisions by de­­mographic change. This opportunity must be seized. That is why strengthening stock investments as an instrument of private old-age provisions in times of declining efficiency of the statutory as­­sessment system is a necessity in terms of asset policy. This requires an increased economic education, which is appropriate for the responsible investor, as well as an end to the regulatory and tax-relat­ed discrimination of stock investment.

il_Hornung_portrait_cmyk-(3)-KopieThe author, after more than 35 years of management experience, 20 of which as CFO, is today an independent man­­agement consultant. Up to 2013, he was an honorary professor at the TU Dortmund and honorary doc­­tor of the European Business School as well as President of the Deutsche Ak­­tien­­ins­­titut e.V., where he is still a mem­­ber of the Scientific Advisory Council.