The future of pensions and retail investment in the EU

The lack of long-term capital is one of the biggest barriers to the development of capital markets in Europe. This report analyses the current state of play in pensions and retail investment markets in the EU; highlights the implications for household wealth and long-term investment in the European economy; and makes nine recommendations to encourage wider and better retail investment and retirement saving in the EU.

Without capital, you cannot have capital markets. Without capital markets, you cannot make the European economy fit for the future. But there is not enough long-term capital in the EU, and it is too concentrated in just a few markets.

There are still reasons to feel optimistic about capital markets in the EU. Ten years after the launch of capital markets union (CMU), the renewed political focus on the EU’s investment needs could provide the necessary momentum for member states and the EU to develop and implement measures that change the way in which Europeans engage with their money.

In the debate on the future of capital markets in Europe, widening retirement saving and widening retail investment are the potential missing link. But there is a danger that by dealing with the two topics in isolation, EU policymakers will miss the bigger picture. We think this needs to change. Neither pensions nor more retail investment can solve this problem on their own. To really move the dial, we need both – and there is evidence from Denmark and Sweden that at their best, retirement saving and retail investment can feed each other.

Over time reforming both could have significant, positive outcomes for millions of individuals in every corner of the EU – and for the wider European economy. For households, reforms could help increase their financial wellbeing and secure their financial futures. For the economy, reforms could unlock trillions of euros of additional long-term capital that is much needed to meet Europe’s investment needs. Supporting the EU’s ageing population and channelling more investment into companies, infrastructure projects, and other long-term projects can help the EU successfully achieve its green and digital transition and is directly related to Europe’s competitiveness.

The first section of this report looks at the role pension systems play in building pools of long-term capital and supporting the development of capital markets. We then analyse and discuss best practice and challenges in retirement saving and retail investment markets in the EU.

Finally, we outline nine proposals to encourage wider and better retail investment and retirement saving in the EU and highlight some difficult truths that are relevant in this debate.

Here is a short summary of this report:

1. The ‘C in CMU’: deep pools of long-term capital such as pension and insurance assets as well as retail investment are the starting point for deep and effective capital markets, but pools of capital in the EU (at 184% of GDP) are smaller than in the US, UK, Japan, or Australia. Too much money in the EU is held in unproductive investments, with negative consequences for households and the European economy.

2. The European pensions opportunity: the level of pension assets in the EU is particularly low, with nearly two-thirds of assets concentrated in just three member states. A (partly) funded pension system that encourages people to accumulate retirement savings is a key building block in securing the financial futures of EU citizens and providing the economy with a large potential supply of capital. 

3. Cash is king? Households across the EU hold on average 34% of their financial savings in cash. This number increases to more than 40% in countries such as Austria and Germany, and to more than 50% in Poland, Malta, Greece. Lower fees and easier access to the EU’s retail investment markets would be a good start to help people shift their money out of bank accounts.

4. The big move: there is a danger that by dealing with retirement saving and retail investment in isolation, EU policymakers will miss the bigger picture. Neither pensions nor more retail investment can solve this on their own. To really move the dial, we need to pair measures to widen retail investment with more structural reforms of pensions and retirement saving in the EU – and there is evidence from Denmark and Sweden that at their best, they can feed each other. 

5. Best practice: it can be politically difficult for the EU to take inspiration from the UK or US, but there are a few examples of countries in the EU itself that have deep pools of long-term capital. Denmark’s partly funded state pension, Ireland’s introduction of auto-enrolment workplace retirement saving, or Sweden’s investment savings tax wrapper can inform gradual or more radical reforms in other member states. 

6. European competitiveness: more developed capital markets are not always the obvious answer to the challenges the EU is facing, but the EU will not be able to address its biggest challenges without them. Channelling more investment into companies, infrastructure projects, and other long-term projects can help the EU successfully achieve its green and digital transition ambitions and increase its competitiveness.

7. Why now? Over the past decade, capital markets have moved up the political agenda across the EU. The renewed political commitment over the past few years now needs to translate into concrete action. Strategic challenges, stretched government budgets, and a new European Commission and Parliament could provide the necessary momentum. 

8. An integrated reform agenda: there are a few essential building blocks that can help encourage wider and better retirement saving and retail investment. We make nine recommendations to help people save better for the longer term, reform and design pension systems to support people and the European economy, and get the best out of the EU’s retail investment markets.

9. The growth potential: we estimate that transitioning the EU’s pension systems to (at least partly) funded models and moving savings out of bank accounts and into the capital markets could unlock around €11tn. Even if only a third of this money would be invested in European assets (in line with the average asset allocation of UCITS equity funds), this would give the European economy a significant boost. 

10. Inconvenient truths: this is a difficult reform agenda. It will take a long time to yield results, it will be politically challenging, and while broad political support will be crucial, not everyone will be happy with every one of these reforms – but they are vitally necessary to address the challenges that Europe is facing.