Mobilising pension and household savings to scale up risk capital
The ALFI/McGill new study ‘Europe's productive capital gap’ shows that Europe is falling behind in mobilising household and pension savings into productive investment compared to reformed pension economies such as Australia, Canada, and Sweden.
The study compares nine countries: four European economies with reformed, capital-based systems (Denmark, Finland, the Netherlands, and Sweden); two successful reformers outside Europe (Australia and Canada); and three major European economies still dominated by PAYG pensions (Germany, France, and Luxembourg).
Researchers find that countries that transitioned to partly funded pension regimes in the 1990s are now poster-child cases of successful reform, showing how gradual changes, compound interest, and equity-heavy investment strategies can dramatically scale up national pools of risk capital.
One key driver of this productive capital gap is the limited scale and depth of funded pension systems. In most European countries, household retirement wealth is concentrated in public pay-as-you-go (PAYG) social security systems, where pension contributions from active workers finance the pension benefits of retirees rather than being invested in financial markets. As a result, Europe’s funded pensions are smaller and allocate less to risky financial assets than those in leading pension markets.
Methodology and Data
This section describes how we categorise pension systems into three tiers. Modern pension systems typically consist of several pension pillars that differ in funding mode, decision authority, and target population (World Bank 2008). Definitions of the pillars can vary across organisations and jurisdictions. For example, in Canada the national CPP plan is sometimes classified as Pillar 1 because it is administered by the government and other times as Pillar 2 because it is an earnings-related program.
To remain consistent with existing approaches, we adopt a multi-pillar framework that organies pension systems by the level of administrative authority over retirement income. Specifically, we define three pension tiers that link the source of retirement income to the corresponding administrative authority: the state, the employer, or the household.
Study takeaways
- Capitalised systems now hold two to three times more risk-bearing assets per worker than predominantly PAYG economies.
- Successful reforms were gradual and long-term, harnessing compound interest.
- Higher household wealth per worker correlates with greater risk capital exposure (for example, Sweden EUR 332,000 compared to Germany EUR 161,000).
- Public and occupational pensions with risky assets encourage voluntary household risk-taking.
- Multiple reform strategies exist, but all share common features: scale, cost-efficient investment vehicles, strong governance, professional asset management, broad coverage, and well-designed financial incentives.
Lessons for Europe
As Europe faces similar political and geographic fragmentation challenges as the countries examined, its reforms can draw on their experiences while tailoring solutions to regional realities. The study highlights two potential pathways for Europe:
- Pan-European “super-default” fund: modelled on Sweden’s AP7 or the UK’s NEST, offering workers across the continent access to low-cost, equity-heavy defaults.
- Employer gateway platforms: pooling contributions to boost bargaining power, cut fees, and expand investment choice, while preserving employer independence.