News from our German office
Germany is in midst of Covid-19 2nd lockdown. Almost 60.000 people died so far through the virus. Vaccination is starting, however compared to US, UK or Israel we started later. USA has elected a new president and gave him majorities in both houses for the coming 2 years. A more reliable government in US will help Europe’s economy. China has increased its weight in world-wide GDP. Economy in Europe will develop in different speed. Italy will need to be kept stable- with or without Super – Mario! Germany’s economy had been shrinking in 2020 by 4.5%. The economy is expected to return to strong growth not before second half of the year, leading to a 5% increase by the end of 2021. However any forecast without deep knowledge about the Covid virus will be dishonest. The economy is split and will need to be looked at from different perspectives: The pandemic showed impressively that parts of the old industry will not be able to survive, new technologies will turn into faster growth. There seems to be no reason why restaurants or hotels should not return to profitable paths, however it will need to be discussed, where and how home office work will have shown better output than the office work before? Will people use the airplanes in the same manner for vacation as before- will it still be possible to get a flight from Frankfurt to Las Palmas for € 19.99 – where the taxi to the airport will be much more expensive than the cost for the flight?
The expansion of the virus will control the World’s economy. The German share market had a strong dropout in February / March 2020 but is already back on track and growth path: Long term the index (DAX) is showing positive returns of almost 8% on average (start Dec. 31st 1987 by 1,000, now ~ 13,500).
Schools need much better equipment for digitalisation and better organisation for using new technologies. The education sector will profit from current developments.
Many open questions and slow working administration. This is Germany in spring 2021.
2021 will bring new general elections, not only for Germany as a whole but also in several counties. The >15-years era “Merkel” will end in September. We even do not know who will be the candidate of the conservatives (Christian Democratic Party / Union)- nor who will be the next chancellor. Our political system has moved to a system of currently 7 parties and many different possibilities for coalitions. The nationalistic “AfD” is the only party, where all others deny to offer any cooperation. The result will pretty much depend whether voters will see the government doing a good or bad job in terms of Covid-19 and in terms of the economy (especially unemployment).
In 2020 the government reduced VAT from 19% to 16% to have more money for consumption in all families and to push some private investments. Now the VAT returned back to 19%. This will have short-term impact on increasing inflation, followed by the expected growth in the economy later this year. As interest rates are Europeanized and other countries amongst the other 26 will not return back to growth as fast as Germany, low interest rates are being expected to be kept low for more years to come.
I doubt that ECB will reduce their tapering policy within next 2 years to come. High volatility will become a “normal status” for share markets- not only for Germany.
What will be new or at least changed in terms of benefits?
A recently published public opinion poll shows that there is only little knowledge about the state cover in case of occupational disability: The graph below shows, that more than 50% of total population trusts into the state system, 60% amongst the younger people. However this is just wrong! The state disability pension ended for those born later than 1961!
In case “You brought your head under your arm” (=worst case scenario; no chance to do any work for at least 3 hours p.d.), the state system will pay a maximum € 835 per month. All people younger than aged 60 should add private or employer’s sponsored subsidiary cover!
In 2021 90% of all tax payers will have reduced tax burden. The “solidarity surcharge” that had been established to have enough budget for the integration of the eastern German counties (1990!), ended. Children’s allowance increased by € 15 p.m. This amount should be used for additional old-age savings or for increasing risk cover for AD & D, disability and/or health care.
“E.S.G.” is getting more important: consultants need to asking clients, whether they wanted “green” investments or not. This is not a big issue as many products now offer even better roi with respecting ESG topics compared to traditional investments. Institutional investors divest capital from carbonizing sectors and invest in “green” technologies. Medical Care (i.e. Pharmaceutical companies as well as IT- specialists for better services in hospitals, at surgeries or in the health care insurance sector), companies that offer video- chatting, video conferences, and some other branches will profit. Due to the ageing German population modern sectors are seeking for skilled staff. The shortage of educated employees is still high. Companies especially in these sectors (pharmaceutical, IT, digitalisation, …) will need a complex package to offer- salary on its own will not help to stabilize.
ECB still has not changed its policy to cheap money. Interest rates of German bonds are all negative. This has also impact on insurance and pension products. Providers need to take down the guarantee level of their long-term products. So far, the German market of (life-) insurance providers (assurance) is still stable, however there is no guarantee that all providers will keep on running for the coming 10 or 20 years. It is well expected that the number of providers by 2035 will be sharply reduced by at least one third of former (1995) 121 and currently 83 companies. The more important for benefits will be to choose the right provider.
Health Care offered by employers to their employees will also become more important in close future. Currently about 10 to 15 providers offer different concepts. There is not yet a trend, what concept will win the highest market share. The size of a company (number of employees) will at least need 20 to get an efficient Medical Care package for the employees.
Pensions: The frame for standard employee benefit pension is automatically linked to the level of state system contribution ceiling. The current threshold is € 85,200 of earnings p.a. This is leading to € 568 maximum tax-free contributions for the standard pension schemes. Employer’s contributions are becoming more and more important. è For new implementations employer’s matching to salary conversion schemes are obligatory. Up to € 284 p.m. are excluded from contributions to the state social security systems.
Baby-boomers start to retire. The next generation that is entering labour market is much smaller.
Benefit packages, including AD & D, Heath Care, Disability cover and Pensions are more important than ever! The funding systems beyond the pension will become more and more important.
Old-age pensions up to a level of € 164 will be kept free from the obligatory retirees’ medical care.
In detail there will be a lot of additional small changes however we think to having put the most important changes and developments into this overview.
We will be happy to help in case of any open questions.
We wish all a successful 2021 and keep well!
Past performance is not a reliable indicator of future results. Rüdiger Blaich
Director - Germany