How addressing pensions gaps could help further develop Europe’s capital markets

The ageing EU population and fewer people of working age are exerting pressure on the sustainability of pay-as-you-go (PAYG) pensions which are the primary source of retirement income. Cutting PAYG pension spending alone would therefore raise future pensioner poverty. 

Pension reforms should address the pension gaps by providing minimum social protection for all existing and future retirees and complementary retirement income sources in the form of private pensions. Pensions gaps are manifold, affecting specific groups (e.g. women, self-employed) or arising at specific moments (e.g. higher income needs later in retirement). Privately managed pensions can complement statutory pensions. Whether they are occupational, personal or statutory funded, these pensions all share the characteristic of being long-term investment instruments and important contributors to building Europe’s internal capital market. 

Recent reforms have aimed at reducing poverty for current pensioners, extending working lives and developing statutory funded schemes. But reforms to improve private pension coverage remain seldom and a missed opportunity. 

Increasing pension participation through compulsion or auto-enrolment can prove effective in reducing pension gaps and provide the scale needed to develop capital markets. Well-developed capital markets can, in turn, offer new investment opportunities benefiting retirement savers and the wider EU economy.

Addressing the pension gaps should therefore be a priority for the next European political cycle.

To achieve this, Member States should develop comprehensive and robust multi-pillar pension systems. Low public trust and confidence in financial institutions and historical dependence on PAYG pensions as primary retirement income mean that many EU citizens are not familiar or comfortable with investing their savings in capital markets and making pension decisions. Potential social resistance to entrusting retirement savings to capital markets should therefore not be underestimated. Gaining social acceptance and trust over time will necessitate transparent pensions systems, public awareness and simple, flexible, appealing and trustworthy private pensions. 

Pensions dashboards can promote transparency by providing information on existing pension gaps and the adequacy and sustainability of pension systems. They can also support informed policy decision on how to allocate public funding to close the gap, whether through increased support for PAYG systems, support for auto-enrolment, or tax incentives for simple pillar 3 savings product. Pensions tracking systems are a first step toward raising public awareness by providing a simple, holistic overview of all pension entitlements. EIOPA has offered advice to the European Commission on both transparency tools and stands ready to provide more support.

Private pensions should be flexible and portable to reflect new labour market realities. As people change jobs, sectors, regions, and sometimes countries, and experience periods of (in)voluntary inactivity, savers risk accruing multiple private pensions that do not contribute to pensions adequacy.

Private pensions should be simple by design, accounting for individuals’ behavioural and cognitive barriers (e.g. inertia, present bias) when dealing with complex decisions such as pensions. As ‘choice architects’, policymakers should carefully consider the use of defaults, limit and frame choices to simplify pension decisions as well as develop low-cost standardised solutions catering the needs of the majority of savers. Product design needs to improve so as to ensure value to consumers and adequate protection.

Private pensions should be appealing by offering tax advantages. They should be genuine with a real opportunity to secure a meaningful retirement income over time. However, full annuitisation may not be optimal for all and may be disliked due to its irreversible nature and impact on inheritance intentions. Solutions seeking to extend savers’ investment horizon beyond retirement age and better match the pattern of their retirement income needs could also help develop capital markets. The insurance sector has an important role to play in this area.     

EIOPA has contributed to strengthening EU pensions regulation, namely IORP II and PEPP.  The PEPP is lagging behind expectations but has many positive features beyond portability: it is flexible, affordable, digital and consumer-centric. It remains a valid option for the future, benefiting both consumers and providers and in the context of addressing pension gaps while supporting the green and digital transitions and long-term growth. To realise its full potential, the PEPP needs to be simplified, fine-tuned and upgraded. 

EIOPA’s remit could be extended to assist Member States’ private pension reforms as well as explore the potential for an EU label or quality mark. This would foster consumer protection and sound supervision and build trust and confidence in private pensions for the future.

Thanks to Carine Pilot-Osborn and Lucian Patulea for their contribution to this article.