Economic recovery and pension investing in the EU

The European economy risks a prolonged and deep recession if there is no quick solution to the global Covid 19 pandemic. One of the ways to help the EU recover from this current crisis is to complete the Capital Market Union.

While European companies are in urgent need of capital to survive and invest, capital markets are fragmented and access to risk capital is unnecessarily limited. So, deepening and integrating the EU capital markets will speed up the recovery, enhance financial stability and help support the transition to an economy with net zero carbon emissions.

In this context the High-Level Expert Group (HLF) has produced 17 recommendations which cover an array of obstacles that all need to be overcome. This is not a case for cherry picking, the expert group takes an integral look and urges EU member states to consider implementing the whole package.

A number of these recommendations stand out though, when it comes to unlocking the vast amount of long-term investments and diversified financing we need in order to make the European economy more sustainable and resilient to shocks in the financial system. For instance, the securitization of bank credit is an important HLF recommendation because it can free up bank capital for SME finance and increase the participation of institutional investors in this market.

Improving pension adequacy is one of the other key recommendations. By growing a large pool of long-term pension savings, capital will find its way towards the real economy. In order to let that happen, pension funds should have sufficient scale to operate as engaged and long-term shareholders and be designed to provide equity finance, both through public and private markets.

For EU citizens there is a clear benefit: the net returns on their savings in a collective pension system with relatively low costs are much higher than what they get on their private bank account or even in a mutual fund.

Increasing participation in pension provisions should be considered by the European Commission. It is an important instrument to deal with an aging population, which deteriorates the ratio between active workers and pensioners.

The recommendation on the areas of pensions includes proposals to improve and monitor pension adequacy in member states, introduce and improve individual member states’ pension tracking systems for its citizens and to introduce capital based occupational ‘auto-enrollment’ pension schemes across all member states, particularly where there is no mandatory occupational pension scheme in place already. Here the Netherlands can serve as a model for capital based pension systems elsewhere in the EU.

There is also a broader understanding within the HLF that we urgently need to transform the European economy to put it on the path towards net-zero carbon emissions. The financial economy and the real economy should be aligned to achieve this, and the same applies to all policy initiatives and measures. It is encouraging that the report acknowledges the connection between the CMU and European Green Deal goals.

In this light the EU recovery fund currently being discussed at a political level, most notably the solvency support instrument, is also crucial to accelerate and expand the pool of long-term equity finance and accelerate the transition to a low carbon economy.

Investing in equity is instrumental in order to give companies the support they need, and to enable that the EU, member states and – ultimately – of course citizens can benefit from the recovery that will result from this intervention. Involving long-term investors such as the pension funds in a public-private collaboration could significantly contribute to the success of the recovery measures. All initiatives in this direction taken by policy makers and market players are helpful to move this debate forward.

To read the full report of the HLF on CMU