Is the ERGO Rente Chance worth it?
Introduction to contract review.
Can I rely on the ERGO Rente Chance?
A customer approached us with this specific question and presented their contract offer for our review.
If you are currently considering this question, this blog article will help you orient yourself and gain a better understanding. Please note, however, that individual parameters may result in your specific offer or contract review being different.
We do not intend to criticize the insurer or the reviewed tariff in a blanket manner with this blog article but rather strive to objectively and objectively examine only the offer that is available to us in its individual composition.
If you also wish for a specific review of your offer or existing contract, you can contact us free of charge and without obligation.
More information: How does a contract review work?
Before examining the details of the ERGO Rente Chance offer, it is important to mention some fundamental points that define a good retirement plan.
Ensure that your retirement plan has a high and realistically expected return for the future.
Consider that all costs reduce your return and therefore should be kept as small as possible.
Additional factors that can reduce returns: Depending on the investment type, you must always consider a number of other negative factors that can reduce your returns. It is important to be aware of these factors from the beginning and factor them into your calculations.
Take advantage of the legal possibilities for tax reduction to maximize compound interest.
Do not underestimate the negative effects of inflation – protect your capital.
If you specifically consider these listed points, you have a high chance of actually increasing your invested capital in the long run.
Contract review master data
Based on the offer in front of us, we see a monthly contribution of 250 euros without an initial investment amount. The assumed contribution duration is the entire contract term of 35 years. A dynamic contribution adjustment is not desired. The age of the insured party at the start of the contract is 32 years and retirement is planned at 67 years old. With consistent contribution payment throughout the entire contract term, a total of 105,000.00 euros will be invested. Additional payments during the contract term and changes in contributions are not considered.
To determine if a contract is truly worthwhile for you, it is necessary to first calculate the realistic average return (before costs and taxes) for the future.
The development of individual securities, such as stocks or funds, is not predictable. To provide a professional evaluation of an investment, it is important to delve deeper. This means initially examining the sources of returns that the investment relies on, specifically the asset classes it invests in.
If we come across an investment with a hundred percent stock component, we will use the long-term expected return of the stock market, which is an average of nine percent per year.
There are numerous scientific research papers on these “market returns” in various asset classes, which we refer to. Relevant literature references can be found at the end of this article.
Based on the market return, which is the long-term development expected for the future, the various types of costs (such as contract costs and fund costs of the respective fund used) and other factors that reduce the return are then subtracted to determine a realistically expected customer return.
The ERGO Rente Chance documents show that 100% of the contributions go into the M&G (Lux) Positive Impact Fund. This fund is an equity fund with an equity share of almost 100%. Therefore, we calculate with a 9% per year return on the global stock market – before costs and taxes (market return). From this, the various factors that reduce returns need to be deducted to determine a realistic average customer return.
If you would like to learn more about the basics of a financial mathematics exam, you can find a link to a separate blog article below that specifically covers this topic.
Costs are specified in the contract.
In the next step, it is necessary to research the different types of costs that significantly reduce your return. These include the costs of the insurer and the fund investment, which are deducted directly from the contract value at different times. Although the other factors that reduce returns do not fall directly into the category of costs and are not paid from the contract value, they should also be considered as they have a direct impact on the return and therefore on your invested capital.
Summary of costs: ERGO costs amount to 13,461.00 Euros, while capital investment costs amount to 97,484.00 Euros.
This includes both the fund costs and other factors that reduce returns.
The different types of costs incurred by the insurer during the premium payment period can be seen in the graphic. The following types of costs should be taken into account:
(Excerpt from the contract offer of ERGO Rente Chance, in which we have added the researched costs in red)
Alpha-Kosten are the closing and distribution costs that are typically deducted from the contract balance over the five-year (60-month repayment period). These costs are paid out as a commission to the intermediary, depending on the type of intermediary (insurance broker, insurance agent, etc.) up to 100 percent. The calculation is based on multiplying the annual premium by the number of years of premium payment duration and adding any initial payment (known as the valuation sum). For particularly long contract terms, the years are limited when calculating the valuation sum, typically 30 to 50 years depending on the insurer.
Dynamic adjustments (such as automatic five percent per year) and contribution increases during the contract period increase the valuation sum. In such a case, when calculating the new valuation sum, it is assumed that the increase amount will be invested until the end of the contribution payment period. The additional annual amount resulting from the contribution increase is multiplied by the contribution years in the future. Each time at the time of the increase, new closing and distribution costs are calculated.
Any additional payment during the contract period also incurs new closing and distribution costs – typically similar to a one-time premium.
If you reduce or completely suspend your contributions before the repayment period, you will not be charged any outstanding closing and distribution costs. However, any costs that have already been calculated will not be refunded to you. After the repayment period expires, there will be no further reduction as the closing and distribution costs have already been fully charged to you.
In our ERGO Rente Chance contract proposal, we have determined an assessment amount of 105,000.00 euros and alpha costs of 2.5 percent.
The annual contribution of 250 Euro for 35 years would amount to a total of 3,000 Euro.
The calculation is 105,000.00 Euro multiplied by 2.5 percent.
The cost of 2,625.00 Euros is divided over 60 months.
(Not considering future changes or additional payments)
The amount of Beta costs depends on the contributions and is deducted from the contract balance immediately after each contribution payment. This cost category belongs to the administrative costs of an insurance contract. Many insurers distinguish between ongoing contributions, initial investments, and additional payments made during the contract period. Some insurers use a scale to calculate these costs, which often leads to a reduction in Beta costs over the contract period.
Early contribution reduction or contribution exemption will result in the adjustment of beta costs from the time of reduction. The disadvantage for you in this case is that if you are charged relatively high beta costs in the first few years due to the tier calculation, you will only partially or not benefit from the later reduction as a customer.
Some insurers involve their customers in the surplus participation, which reduces the beta costs.
Attention: The surpluses are determined annually and are not guaranteed. Therefore, they could also be completely eliminated next year for the entire remaining term of the contract.
In our ERGO Rente Chance contract offer, we have calculated beta costs of 10.32 percent for each monthly contribution of 250 euros.
The calculation is 250 Euro multiplied by 10.32 percent, which equals 25.80 Euro multiplied by 12 months and 35 years of contribution duration.
The total cost for beta expenses over the entire contract period is 10,836.00 Euros.
Gamma-Kosten is a percentage cost rate that is typically calculated based on the total contract balance at a given time. This type of cost is the largest expense for most long-term contracts. It is considered as part of the administrative costs of an insurance contract. These costs are usually calculated annually directly from the contract balance. However, some providers may also display Gamma-Kosten on a monthly basis, so it is important to verify the billing frequency being used.
Ongoing premium payments, dynamic adjustments, additional contributions, and interest accumulation over the years result a constantly increasing calculation basis. The fixed percentage cost rate often leads to a significant increase of the cost amount, which is calculated based on the contract balance. Some insurance companies also apply different percentage gamma cost rates for different types of contributions, such as ongoing premium payments or additional contributions.
We were unable to determine the gamma costs in our contract offer for ERGO Rente Chance.
Kappa costs are also known as administrative costs or unit costs. They are deducted directly from the contract balance. However, not all insurers calculate this type of cost. If they do apply, it is a fixed annual amount, regardless of any individual contract details.
In our contract offer for ERGO Rente Chance, we were unable to determine the Kappa costs.
Excerpt from the essential investor information of the M&G (Lux) Positive Impact Fund.
The costs of the capital investment, or the fund, can be found in the excerpt from the “Essential Investor Information”. The following types of costs should be distinguished:
Issue surcharges and redemption discounts.
These costs are incurred once for each deposit or withdrawal and often serve as compensation for a bank or investment advisor. They are sometimes deducted directly from the investment amount or must be paid separately. The calculation method can be misleading as it leads to different costs. Under certain conditions, these costs are occasionally discounted or waived entirely.
However, often the ongoing costs of a fund are higher, which has a significantly more negative impact on longer-term performance than the cost advantage of the discount on the front-end load. In most insurance-based retirement contracts, these types of costs are completely waived and therefore should not be considered.
The ongoing costs are deducted directly from the fund balance by the investment company. The amount of ongoing costs can be adjusted without your consent. You are not actively informed about this, but you can research on your own after the end of a fiscal year to find out the percentage of costs on your fund balance.
Just like the gamma costs, the calculation basis increases over the duration of the contract. The ongoing contributions, dynamic adjustments, additional payments, and interest form an increasing calculation basis over the years. As a result, the percentage cost rate often leads to a significantly increasing cost size, which is calculated from the fund balance.
According to the essential investor information for the M&G (Lux) Positive Impact Fund, which is included in our ERGO Rente Chance contract offering, there are annual ongoing costs of 1.96 percent that are calculated on the total fund balance. Due to the unpredictable nature of fund performance, it is not possible to accurately quantify the ongoing fund costs for the future. In our financial mathematical evaluation, we have assumed a consistent fund performance and no potential changes to the ongoing fund costs.
These factors are not directly charged to you as a customer, but they must be considered because they have a direct impact on your returns and therefore your capital. The amount of these factors is influenced by the investment strategy, so we classify them as part of the costs of capital investment for better understanding. Just like the ongoing costs explained above, these influencing factors should be considered annually as a percentage and cannot be precisely calculated for the future. Hundreds of scientific studies confirm that there are several factors that reduce returns.
In the research for our contract offer of ERGO Retirement Opportunity and the selected investment strategy, we have taken into account the following factors that may reduce returns.
Opportunity costs due to potentially unfavorable investment decisions compared to the scientific, evidence-based investment strategy are estimated to result in an average annual reduction of 0.50 percent in returns.
Transaction costs are estimated to reduce annual returns by an average of 0.50 percent.
The estimated average reduction in returns due to the chosen investment strategy is 0.20 percent per year.
For a detailed explanation of these and other negative influencing factors, we have written a separate extensive blog article. You can find the link to it at the end of this article.
In the literature references, you will find a study that highlights the differences between conventional asset management and evidence-based investing.
The result of our examination on the ERGO Rente Chance.
We have created an expert opinion using our financial mathematical software, which clearly presents all factors in euros over the entire contract period on the results page.
The costs and other factors that reduce the return on a financial product directly affect the return on your invested money. These are often difficult or sometimes not even visible in the extensive offering and contract documents.
The total amount of contributions made over 35 years is calculated by multiplying 250 Euros by 12 months and then by 35 years.
The total costs of the capital investment include fund fees and other factors that reduce returns.
The total costs of ERGO during the contract period, which are directly deducted from the contract.
This is the representation of the total burden in euros over the 35-year contract duration.
Estimated gross final capital payout after 35 years.
Projected net capital payout after 35 years.
Projected gross pension after 35 years of contribution.
(Results page from the financial mathematical report)
The total deposit over the contract term is 105,000.00 Euro. The costs taken from the contract documents by ERGO amount to a total of 13,461.00 Euro. The total costs of the capital investment plus other negative factors amount to 97,484.00 Euro.
The final capital amount is 242,607.94 euros. Taxes are due on this final amount if fully paid out at the end of the contract. Based on our tax requirements, this results in a one-time tax liability of 16,554.63 euros, resulting in a net capital of 226,053.32 euros.
You can also choose to receive a lifelong pension from the ERGO Rente Chance. The monthly pension amount is determined by the contract balance at the start of the pension, multiplied at least by the guaranteed pension factor. In recent years, many insurers have repeatedly reduced the higher pension factors that arise from surpluses. Therefore, we calculate with the guaranteed pension factor, which is 25.25 euros per 10,000 euros contract balance at the planned retirement age.
The monthly gross pension is calculated as follows: 242,607.94 Euro divided by 10,000 multiplied by 25.25 Euro guaranteed annuity factor equals 612.59 Euro.
Our conclusion on the ERGO Rente Chance.
The initial impression of receiving a lifelong gross pension of over 612.59 euros from a monthly investment of 250 euros seems reasonable. Additionally, the ratio of 105,000.00 euros paid versus a net capital payout of 226,053.32 euros may also appear to be a good result at first glance.
However, the following must be taken into consideration.
If you choose to receive a monthly pension of €612.59 (before taxes) at the age of 67, instead of a lump sum payment of €242,607.94 (before taxes), you would need to receive the pension for 396 months, which is just over 33 years. Therefore, you would need to live to at least 100 years old to truly benefit from the pension option.
Additionally, it should be noted that due the average inflation rate of about two percent per year, the purchasing power, or value, of the pension will be significantly reduced. Taking this inflation rate into consideration, the pension of 612.59 Euros will only have a “value” of 306.31 Euros in 35 years.
If you decide to opt for a lump sum payment at the age of 67, you should also take into consideration that the purchasing power of the payout will be significantly reduced due to inflation.
With an assumed annual inflation rate of two percent, the net capital payout of 226,053.32 euros will only have an actual purchasing power of 113,032.90 euros.
When comparing the purchasing power of 113,032.90 with the deposited sum of 105,000.00 euros, it becomes clear that the goal of at least capturing inflation was achieved, but no significant additional return was obtained.
The loss of purchasing power of the pension or final capital payment due to ongoing inflation cannot be prevented by ERGO. This also applies to any alternative investment product and should therefore be taken into account.