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Pension gaps


Pensions in Europe include a public and a private part. Public pensions (pillar I) are mandatory and aim to provide all pensioners with a basic level of income. They are generally financed on a pay-as-you-go (PAYG) basis, with the contributions to the pension system from the working age individuals paying for the benefits of current retirees, which means they are not pre-funded and have no disposable assets. Private pensions include occupational pensions sponsored by employers (pillar II) and voluntary personal pensions (pillar III), both of which work on an asset accumulation basis.

The majority of pension spendings in Europe are channelled into public PAYG pensions which amounted to 12.5% of GDP in 2020 on average in the EU. The annual expenditure on private pensions is much lower and is less than 1% of GDP in most EU countries, expect the NL, Sweden and Denmark compared to spendings amounting to 5 to 7% of GDP in the UK, Canada and USA. As a result, the size of pension assets likely to be invested for the long term in capital market instruments is much lower in the EU (around 30% of GDP) than in the US or Canada where they amount to 130 to 150% of GDP.

Pension systems are facing many challenges, that may lead to a pension gap in the future. PAYG systems are impacted by the ageing of the population and the shrinking of the share of the active population. Most Member States have conducted pension and labour market reforms, postponing normal retirement age and increasing contribution periods in order to improve future pillar I pension sustainability and adequacy.

Measures have also been taken to develop private pensions at Member State and EU levels (for example with the IORP II and PEPP frameworks), but their impact has so far been limited. A majority of European citizens still rely mainly on the public pension system. The prerogatives of the EU in terms of pensions are limited to aspects that concern the internal market for private pensions and a consultative role for the provision of best practices. Therefore any fundamental reforms of pension systems remain a Member State competence.

A further aspect to consider is the role that pension systems play in the development of capital markets. Pre-funded pension systems are indeed providers of significant sources of long-term capital that are mostly invested in the capital markets to achieve sufficient returns. Countries that have significant pre-funded pension systems therefore tend to also have developed capital markets. Some actions have been taken in the context of CMU to develop private pension savings. These include the provision of best practices in the areas of auto-enrolment, pension dashboards and pension tracking systems. The Retail Investor Strategy should also contribute to a greater participation of savers in the capital markets, including via pension products. It is expected that pensions will be a more significant theme in the future stages of the CMU.

Eurofi documents

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Eurofi Views Magazine chapter

Pension and long term savings gap - February 2024 new

Petra Hielkema - European Insurance and Occupational Pensions Authority (EIOPA) | Jos Heuvelman - Dutch Authority for the Financial Markets (AFM) | Miquel Magem Ambrosio - Allianz SE | Michele Rendine - Assicurazioni Generali | Agustin Reyna - The European Consumers’ Organisation (BEUC)