Retirement provision: A portfolio for free

For savers, this is good news: ahead of the start of the new pension deposit, financial companies are in a real race to offer the lowest fees. Various providers have already presented their products for state-subsidized private pension, which is to replace the Riester pension from January 1, 2027. On this Tuesday, Trade Republic, the largest German neo-bank and thus an important competitor in the market, presented its terms. Trade Republic promises to waive all fees. The state promotes private savings with up to 540 euros per year. The money must be invested in a separate account and will only be paid out at retirement. What do the offers look like in comparison? It has become apparent in recent weeks that there is a fierce price battle between the providers. Scalable Capital was the first to enter: the provider demands 0.15 percent fees per year, and these fees are to be waived for the year 2027. With Deka-Bank, the fund provider of the Sparkassen, only 0.1 percent costs per year are to be incurred for the cheapest product, which is similar to the offers from Deutsche Bank and DWS. There are a number of other providers who have already presented their products, and for many, the fees are waived for a certain period. Until the start on January 1st, further offers are expected to come, and some financial companies are still working on products. Consumers will probably be confronted with this topic often in the coming months. Trade Republic, for example, plans to promote its offer with the largest campaign that the company has ever financed, according to its own statements. What exactly are the fees about? In principle, fees may arise for the execution of the savings plan, account management, and product costs for the ETFs saved, and there may still be a commission. Those who compare offers should keep all of this in mind. Many providers waive part of the fees or grant fee-free status for a certain period. With the offer presented by Trade Republic, all fees are waived, including product costs for several dozen selected ETFs from the major providers Blackrock, DWS, and Vanguard. There is no limitation. "Our pension deposit is completely free," says Christian Hecker, CEO of Trade Republic. Can the providers increase the fees further? Whether the advertised low conditions will hold will only be seen when the concrete offers are available, says Niels Nauhauser from the consumer center Baden-Württemberg. "What is significant is not the number in the advertisement, but the statement of effective costs in the product information sheet. It shows how much the costs reduce the return in total for the year." With time-limited offers, it is already clear that fees will increase later. "One should always compare the price after the promotional phase," says Nauhauser. Providers can only increase costs if the contract effectively provides for it. "They must announce the increase four months in advance to the end of the quarter. After all, consumers may switch for free in cost increases in the new pension deposit contracts." Without the consent of the savers, product costs of the funds in the pension deposits, which mostly come from third parties, can be increased. For example, if an ETF provider increases its annual cost ratio. "It is unclear whether this also triggers a right to switch for free," says Nauhauser. If the pension deposit costs almost nothing, how do the providers make money then? According to a survey published on Monday by the German Securities Service Bank and the fintech Lemon Markets, the companies are currently more concerned with attracting customers or preventing their departure. Decision-makers in 88 financial institutions and service providers were surveyed for this investigation. 28 percent of those surveyed found the standard deposit difficult or hardly economically viable, yet 77 percent intend to offer it. The reason lies in customer relations: 84 percent see customer loyalty as the most important strategic added value of the standard deposit. Hecker from Trade Republic says: "We do not receive any refunds or commissions for the products in our free pension deposit." The goal is mainly to attract new customers with the state-subsidized offer – those who, hopefully, will use other services from Trade Republic in addition to the pension deposit and thus generate revenue. What exactly is a standard deposit? In principle, financial companies that want to participate in the new state-subsidized model must offer two different standard deposits: one with low risk and one with more risk and a higher share of stocks, which offers the chance for higher returns. In these standard deposits, the legislator has capped the fees at a maximum of one percent. This led to dissatisfaction in the financial industry, which argued that at this price it could no longer offer advice. Looking back, the discussion seems somewhat outdated now that so many providers are advertising offers on the internet that charge only a tenth of the maximum allowable fees or waive fees entirely. However, it is important to know that in addition to the prescribed standard deposits, financial companies are also allowed to offer other products in the pension deposit – for which no fee cap applies. For example, Deka-Bank also plans an "individual offer," for which fees of one to 1.5 percent per year are to be charged and which is offered to many customers in Sparkassen branches. With Trade Republic, in addition to the free ETFs, you can place a range of other products in your pension deposit where costs are incurred. "For the first time, we now also offer actively managed funds at Trade Republic," says Hecker. Why are the fees so important? Even a single percentage point of cost can make a big difference over a long period due to the compound interest effect. A pension deposit usually runs for decades, and with the planned early retirement, the government ultimately wants to convince the Germans to save privately for retirement as early as six years of age. Those who want to understand the compound interest effect can do that with the 72 rule. The rule of thumb states: 72 divided by the annual return gives the number of years it takes for a savings sum to double. A greatly simplified example calculation: Suppose 10,000 euros are invested for a six-year-old in a portfolio with an average annual return of 7.2 percent. Then the sum doubles every ten years and is worth 640,000 euros after 60 years – the child is then 66 years old and going to retirement. If fees of, for example, 1.2 percent per year were charged on the same portfolio – a cost ratio that is not unusual for actively managed funds – the return would fall to six percent. The investment would only double every twelve years and would have reached a value of only 320,000 euros after 60 years. Expensive products must therefore achieve a significantly higher return than a cheap index ETF in order to be competitive despite the fees. Statistically, this is achieved by the fewest. Do I have to hurry to get a good offer? No, the promotion only starts on January 1, 2027, and even after that, you can sign a contract for a pension deposit at any time. "With discount offers, providers want to bind their customers early," says Nauhauser. "They play hardly any role in long-term investment success." A major provider may not even be available on January 1st yet: the state, which must establish its own standard product according to the Bundestag's decision. The financial industry has already made much criticism of state competition, which consumer advocates have demanded as a cheap, non-commercial alternative. Whether the state can actually be cheaper than the now almost free offers from the private sector is questionable. "But we still need the state standard deposit as a reliable alternative and as a price anchor," says Nauhauser. When the state deposit will come and who will manage it is not yet known.