Germans’ realization that they may not be able to rely on a state pension to maintain their living standards in retirement is fueling expansion of the country’s mutual fund market. From 1985 to 1995, volume grew at a compound annual rate of 21 percent. How the market develops from here depends on what the German government does further to encourage private pension provision. But even without tax incentives, we estimate that the mutual fund market will continue to grow by about 14 percent a year, reaching DM1.5 trillion by the end of 2005 (Exhibit 1). That could translate into revenue of DM26 billion for the industry, compared with about DM8 billion today.

Who succeeds in winning this new business will partly depend on the future design of the German pension system. But much also depends on the role the various operators choose to play in what is set to be an intensely competitive market.

More mutuals

The move into mutual funds has been spurred partly by the fact that they have tended to yield higher returns than the deposit accounts usually favored by Germans, and partly by the looming crisis in the country’s pay-as-you-go social security pension system. If...