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.
The 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.