German Pension Reform Act’s approach to private schemes opens market to providers

I. The guarantee-free Altersvorsorgedepot as a door-opener

State subsidies for private pension provision were previously subject to two conditions:

• A contribution preservation guarantee, whereby at least the contributions paid in had to be available at the start of the payout phase; and
• A mandatory partial annuitisation from the age of 85, which in practice required the involvement of a life insurer.

The contribution preservation guarantee effectively ruled out products offering higher returns, while the compulsory annuitisation requirement effectively prevented non-insurers from offering standalone products. Both requirements therefore acted as structural barriers to market entry for many providers – and it is these hurdles that the German Pension Reform Act removes.

A fundamentally new range of products will become available from 1 January 2027: alongside the guaranteed products, which remain eligible for subsidies, the non-guaranteed AVD will be available as a separate product category, including the Standarddepot as a standardised option.

A contribution preservation guarantee is not mandatory, and, instead of a lifetime annuity, a choice can be made at the start of the payout phase between a life annuity and a payout plan (until at least the age of 85). This opens up the opportunity for providers to enter the market for subsidised private pension provision with an independent, return-oriented pension product.

In detail, the new product landscape is as follows:

1. The Altersvorsorgedepot (AVD)

The AVD is a key component of the reform and enables providers to offer an opportunity-oriented pension product without capital guarantees.

Under an AVD contract, retirement savers can participate in the capital market over the long term and – within the statutory options – invest in a broadly diversified investment universe. These include, in particular, fund investments, including exchange-traded fund structures, certain regulated real-value-oriented fund vehicles for infrastructure or property investments within the permitted scope, and selected debentures and bonds.

The aim is to unlock higher long-term return potential compared with traditional guaranteed products; accordingly, neither a minimum capital balance at the end of the savings phase nor a minimum return may be agreed in the AVD contract.

The German legislator has also provided for a statutory cost cap – though exclusively for the Standarddepot as a standardised variant. The effective costs there may not exceed 1 per cent.

Investment selection / Start of the payout phase

Investment selection is generally the responsibility of the provider, unless the contracting party makes use of a contractually granted right to select investments themselves from among the available options. The start of the payout phase can be freely determined within a timeframe of at least five years; the intended commencement must be notified no later than three months before the desired start date.

Restructuring the payout phase

The reform makes the payout phase significantly more flexible, thereby lowering the barriers to entry, particularly for providers outside the traditional life insurance sector.

In future, the accumulated capital may, in addition to the traditional lifetime annuity, also be paid out via a fixed-term payout plan, which ends no earlier than upon reaching the age of 85. The monthly payment is recalculated at the start of the payout phase and subsequently at recurring intervals of up to three years; for this purpose, at least 80 per cent of the capital still available at that time is distributed across the remaining months until the end of the term. Any remaining capital is paid out at the end of the term.

This means that a lifetime annuity is no longer mandatory. In practice, this reduces the previous structural requirement to work with a life insurer for the payout phase and enables providers to offer a pension product, including a payout mechanism, without the involvement of an insurer.

2. The Standarddepot

The Standarddepot is legally designed as a low-threshold variant of the AVD and aimed at customers seeking an uncomplicated entry point into state-subsidised private pension provision. Every provider of an AVD is obliged to also offer a Standarddepot.

Investment structure and life-cycle management

The Standarddepot follows legally defined default settings: the provider specifies two undertakings for collective investment in transferable securities (UCITS) funds with specific risk classes; a standardised rebalancing and de-risking mechanism manages the investment structure throughout the life cycle. Individual decisions by the customer are only required if they wish to deviate from the default settings.

Digital sign-up and cost caps

The Standarddepot is designed for a straightforward, digital sign-up process without the need for prior advice. The effective costs are capped by law at a maximum of 1 per cent.

II. Certification procedure

Any provider wishing to offer tax-subsidised private pension products under the new subsidy framework must first obtain certification under the Private Pensions Certification Act (Altersvorsorge-Zertifizierungsgesetz (AltZertG)). This is the formal prerequisite for pension contributions to be eligible for tax relief. It is granted, upon application by the provider, by the German Federal Central Tax Office (Bundeszentralamt für Steuern) (BZSt). Certification confirms statutory compliance. It is not a quality mark for the product itself, but regulatory proof of eligibility for tax relief.

Certification subject to revocation

From 1 January 2027, the certification procedure will, in practice, become significantly more market-oriented. Certification may be granted subject to a revocation option. This reduces lead times: a complete preliminary assessment to the same extent as before is not strictly required beforehand; instead, the procedure relies more heavily on declarations and certificates from the provider and the submission of the necessary documentation. The revocation option generally applies for two years; for applications submitted by the end of 2028, this period is extended to four years.

In practical terms, providers submitting imprecise, incomplete or inconsistent information run the risk of the certification being revoked within the reservation period, with immediate consequences for contracts based on the certificate. However, in certain circumstances, the applicant may also request that certification is granted only after a full review; in such cases, the certificate is issued without a reservation for revocation, albeit subject to a higher fee.

Required application documents – overview

In practice, the application for certification under section 4 of the AltZertG primarily comprises two key sets of documents.

Firstly, sample contracts and evidence of certifiability must be submitted. The starting point is the final version of the sample contract: the binding text on the basis of which the product will be marketed. In addition, the law requires documents proving that the contractual terms are certifiable.

Secondly, proof of provider status or regulatory status is required: as a rule, this takes the form of a certificate from the competent supervisory authority confirming the scope of the authorisation.

Electronic application

Applications must be submitted electronically to the BZSt via the officially designated interface as soon as access to it is granted. Providers who meet the regulatory requirements at an early stage can secure a significant first-mover advantage.

The AltZertG provides that the opening of the portal for certification applications, as well as the officially prescribed data set and the data interface, must be announced by the certification body in a notice published in the Federal Tax Gazette (Bundessteuerblatt). Applications are expected to be submitted via the Federal Portal (Bundesportal) (BOP).

However, access via the BOP has not yet been officially opened and the timeline has not been confirmed.

III. Investment firms as providers – no level playing field

The AltZertG distinguishes between two categories of providers. Some companies are automatically recognised as “positive list” providers by law (Anbieter-Positivliste) (section 1 (2) (1)-(3) AltZertG). In Germany, this covers life insurance companies, deposit-taking credit institutions, building societies and external alternative fund management companies.

From other European Economic Area (EEA) states, the positive list includes Solvency II insurance companies, Capital Requirements Regulation credit institutions and investment firms, provided they are authorised to operate in Germany via a branch or tied agents under section 73 (1) of the German Investment Firm Act (Wertpapierinstitutsgesetz (WpIG)) and UCITS management or investment companies.

Providers not included on the positive list may only acquire provider status by meeting additional requirements:

• Initial capital of at least EUR 730,000
• Funds may only be invested through credit institutions
• The institution must not be subject to a reduced or simplified supervisory regime

The German Pension Reform Act specifies that this route is available to financial services institutions, investment firms and credit institutions registered in Germany that do not hold a deposit-taking licence, as well as Markets in Financial Instruments Directive II (MiFID II) investment firms registered in another EEA state.

As a result of the German Pension Reform Act, EEA investment firms operating via a branch or through tied agents established in Germany are automatically included in the positive list of providers. They are not required to meet the additional requirements. By contrast, investment firms established in Germany and MiFID II investment firms established in another EEA state that operate in Germany on a cross-border basis (section 74 WpIG) must fulfil all the additional requirements.

Whilst it is to be welcomed that the EEA investment firms operating through a branch or through contractually bound intermediaries established in Germany are not required to meet the additional requirements, as this facilitates their market entry, there is nonetheless a structural disparity in treatment compared with domestic investment firms, which must meet all the additional requirements.

The explanatory memorandum to the German Pension Reform Act provides no objective justification for this differentiation. The inclusion of EEA investment firms operating through a branch or through tied agents established in Germany on the positive list of providers is conceived merely as a consequential adjustment resulting from a regulatory restructuring: specifically, the separation of the regulation previously bundled in the German Banking Act (Kreditwesengesetz) (KWG) between the KWG and the WpIG. The resulting discrimination against domestic institutions is likely to be attributable to a drafting oversight on the part of the legislature. No market challenge has yet emerged, but it is to be hoped that the legislature will still create a level playing field and grant domestic securities institutions privileged access without additional conditions.

IV. Federal Goverment as a new competitor

In future, the federal government will be able to introduce a publicly funded Standarddepot onto the market by ordinance (Rechtsverordnung): a subsidised private pension product offered not by a private provider but by a yet-to-be-determined public body.

The German Federal Republic is entering the market for subsidised private pension provision as a direct competitor. However, this authorisation is expressly limited to the Standarddepot. The AVD, as the core product, remains exclusive to private providers.

V. Conclusion: Seize the opportunities now

The Pension Reform Act removes the two main barriers to market entry in the previous Riester scheme: the contribution preservation guarantee and the obligation to provide a lifetime annuity. This will open up a market from 1 January 2027 that was previously closed to many providers. In particular, credit institutions and investment firms will, for the first time, be able to offer state-subsidised private pension products independently without the involvement of a life insurer. The obligation to provide a Standarddepot as a low-threshold entry-level product alongside the Altersvorsorgedepot could also present an opportunity to tap into a broader customer base.

The starting position is particularly attractive for EEA investment firms with a domestic branch. They are recognised as an independent primary provider category without any additional conditions. Certification under the AltZertG is crucial for market entry. In future, this may be granted subject to revocation, which shortens lead times, but at the same time places high demands on the quality and consistency of the application documents.

After years of market withdrawal, the field of providers has thinned out considerably. This could present an opportunity. Those who now meet the certification requirements, establish the necessary product architecture and carefully prepare their application documents can secure a decisive first-mover advantage in a market with significant growth potential.