Special Adviser Niko Väänänen of the Finnish Centre for Pensions monitors developments in pension systems across other countries and tracks the evolution of European Union pension policy as part of his professional duties. In recent years, Väänänen has also served as an advisor on pension reform initiatives abroad, including in Azerbaijan and Gabon. We interviewed Väänänen and discussed EU pension policies, with a particular focus on the Savings and Investment Union.

You have recently completed an analysis of EU pension policy. For most Europeans — even many experts — this topic remains rather unfamiliar. What exactly is meant by EU pension policy?

EU pension policy is undoubtedly something of an unknown giant. Public discussion often claims that it simply does not exist, treating pension policy as if it were only a national concern. This has not been the case for some time.

In brief, pension policy refers to the measures agreed by EU countries, the Commission and Parliament to develop pensions. For example, if a Dutch employee is posted to work in Germany for a year, EU regulations determine how their occupational pension is insured. Traditionally, EU pension policy has focused on ensuring that people can move freely within the EU without having to worry about the continuity of their social security.

Nowadays, the term ‘EU pension policy’ is increasingly used to refer to initiatives and actions at the union level that are intended to have a more direct impact on the pension provision of the EU member states. A recent example is the Savings and Investment Union initiative led by the Commission, through which it is promoting the development of funded supplementary pensions across the EU. Recent reports by Draghi and Letta have emphasised that the EU’s capital markets lack long-term capital, citing the low level of pension funding as a contributing factor. They argue that pension funds and capital markets are interdependent: deepening the latter requires strengthening the former.

Some experts consider the impact of member states’ pension systems on one another to be part of EU pension policy. Within a unified economic, capital and labour market area, the pension frameworks of European countries are not isolated islands; pension reforms and court rulings can have far-reaching consequences across many countries. For example, the European Court of Justice ruled decades ago that occupational supplementary pensions should be considered part of salary, meaning that all genders must be treated equally. Since then, gender has not been a factor in determining the amount of occupational supplementary pensions in any EU member state.

The saying goes that the EU grows stronger through crises. How have they shaped EU pension policy?

Although the pension systems across European countries differ significantly, many have faced comparable challenges. In the past, older workers were made to retire early as part of structural reforms. In some cases, individuals actively chose this path; in others, they were compelled to leave the workforce. Either way, this approach sent a misleading message to society regarding the employment of older people. Since then, member states have worked to extend working lives by reducing opportunities for early retirement, investing in occupational health and well-being, and raising the retirement age.

Shared crises that have shaken several countries simultaneously include the financial crisis, the euro crisis, and the coronavirus pandemic. One could also argue that the prolonged period of very low interest rates over the past decade constituted a crisis, given that it caused low pension funding levels in certain countries. Responses to these crises were sought at the European level. The Commission was actively involved in seeking solutions.

One significant outcome of the crisis of recent years has been the increased influence of the Commission over pension affairs. Additionally, the oversight and regulation of funded pensions in Europe have been strengthened. These developments have benefited those insured.

Pensions have become a more prominent topic at the European level, and the EU wants to have a say on pension policies. What are the consequences of this development?

Pensions are increasingly discussed at EU level. The growing prominence of EU‑level coordination is a natural development: while member states remain focused on their national pension systems, EU processes provide a union‑wide view of the challenges and needs across all 27 member states. There is also a sustained push to harmonise financial markets, meaning that funded pension provision is increasingly regulated and monitored at EU level.

The EU’s expanding role manifests itself in several ways, especially through its executive arm, the European Commission. Firstly, pension policy is now more Commission-driven, with pensions being addressed more often at the Commission’s initiative. For example, the European Semester for economic policy coordination has evolved into a significant institution for pension policy over the past decade. The Semester is based on economic policy rules, which the Commission oversees.

Another significant development is the increasing prevalence of pan-European initiatives. Taxation remains a matter for national decision-making, but the Commission can encourage member states to improve their funded pension provision. The aim is to promote supplementary pensions across the Union, as they play a crucial role in achieving the objectives of a savings and investment union. Introducing funded supplementary pensions would represent a major shift in pension policy for many countries, given that substantial pension funds currently exist in only a few EU member states. Furthermore, collective supplementary pensions are traditionally advanced by social partners, yet several countries lack meaningful social dialogue.

The Commission views the Savings and Investment Union as a way of strengthening the European financial system by channelling savings into productive investments. According to the Commission, this would provide savers with more opportunities to build wealth and support business growth across Europe. However, it is also worth noting that the Commission has not had much success in strengthening supplementary pensions in the past. Earlier this year, the European Court of Auditors criticised the Commission for failing to strengthen occupational supplementary pensions, even though it had clearly said it would.

Thirdly, it is important to highlight the operational mechanism of the Recovery and Resilience Facility (RRF), which was established in response to the coronavirus crisis. Together with the Commission, member states have agreed on national recovery plans designed to foster green economic growth that the financing is based on. The Commission monitors progress on these reforms and allocates financing when specified milestones are met. For instance, both Spain and Belgium have incorporated pension reform into their respective plans. Although these strategies are built upon national priorities, it is not unreasonable to suggest that the Commission has assumed the role of gatekeeper for pension reforms. From a Nordic perspective, it may seem unusual that national pension reforms require agreement with the Commission.

The assessment by the European Court of Auditors of the Commission’s efforts to advance European pension provision is far from flattering. In the spring, the Court made it clear that the Commission has not achieved its objectives at any level. It has failed to create an internal market for occupational supplementary pensions. Its attempts to foster cross-border pension funds and the European personal pension product has also faltered. Despite many EU level initiatives, is pension management across Europe still largely handled at the national level?

It is important to recognise the political realities at play. Pension systems have been developed at a national level and embody a sense of national solidarity and reciprocity. Therefore, there may be some reluctance to introduce models from outside these frameworks.

Nevertheless, as highlighted in the Draghi and Letta reports, the Commission has invested considerable effort and political capital in raising the profile of supplementary pensions, presenting their development as a key element of Europe’s sustainable future. The challenge now is to find a practical way forward that ensures the involvement of all necessary national and European stakeholders in seeking solutions. I believe the social partners could play a pivotal role in this.

At the same time, the Savings and Investment Union has sparked considerable debate. The basic idea behind it – growing pension funds and directing pension capital into investments – is not new. For example, Japan’s Government Pension Investment Fund (GPIF), which is one of the largest public pension funds in the world, has always invested heavily in the Japanese market. Legislators are now considering expanding its role. Despite their international diversification, Swedish pension funds also invest heavily in their own country, including in smaller companies and venture capital. How could countries with only pay-as-you-go pension systems be persuaded that funding pensions can benefit everyone?

If Europe wants its growth companies to be less reliant on international investors, it needs to invest more in its own enterprises. Strengthening European financial system is essential, given that capital has become a geopolitical instrument on the global stage. National actors play a key role in supporting local financial markets.

In my view, strengthening European finance specifically through pension capital is a logical move. Voluntary pension saving rarely manages to accumulate significant capital on its own. For this reason, I believe it is unlikely that Europe will see substantial new pension assets emerge without the active involvement of social partners or some form of autoenrollment. These stakeholders have the means to encourage people to consistently save for retirement throughout their careers while keeping costs reasonable. Moreover, individual savings schemes can sometimes present issues with consumer protection. Collective supplementary pension schemes, as seen in Belgium, Denmark, Sweden and the Netherlands, can therefore deliver better outcomes by reducing costs and ensuring a higher standard of consumer protection.

From an economic perspective, it makes sense to pre-fund pension provision, particularly when you consider that returns on capital have outperformed economic growth over the long term, as Thomas Piketty and others have highlighted. A funded pension system can deliver higher pensions than a pay-as-you-go system with the same level of contributions. There is nothing inherently wrong with pay-as-you-go arrangements; they enable redistribution between generations and can help balance income disparities within generations. However, the most effective approach is to combine both funding methods for pension provision, as each carries its own risks. I believe this is a view shared by most experts in the field.

It is important to acknowledge that funded pensions carry certain risks. Increased reliance on financial markets for pension security can expose pension schemes to vulnerabilities during financial crises or periods of conflict – this is a reality that cannot be overlooked. Furthermore, placing too much emphasis on funded supplementary pensions within the broader pension system can lead to greater inequality among pensioners. There is also the question of whether using pension funds as instruments of industrial policy goes against the fiduciary duty to secure the best possible return for members at an agreed level of risk. Pursuing industrial policy objectives alongside investment returns is not without its difficulties, and this issue warrants further discussion.

Enrico Letta, the former Prime Minister of Italy, examined the Investment Union and concluded that Europe does not lack capital; rather, it lacks the mechanisms to mobilise it. The important question is not whether Europe has the capital, but whether it can use it in the right way, is it not?

Letta’s key point is that Europe lacks long-term capital because funds are sitting idle in bank accounts. There are no effective mechanisms in place to channel these assets into long-term investments. This creates a mismatch between savings and investment across Europe: although households are saving, this money is not being invested in innovative, risk-taking enterprises. Consequences include company listings flowing to the United States, underfunded European growth companies and heavy reliance on bank financing. In short, European savings are supporting growth abroad rather than at home. If these assets were invested through future European pension funds, they would generate better pensions and stimulate the growth of European businesses.

At the same time, it is worth noting that EU member states have distinct cultural differences in their attitudes towards funded pensions. In the Nordic countries, for example, the prevailing approach is pragmatic: pre-funding is simply a practical means of financing pensions. I suspect that in some other member states, funded pensions do not enjoy the same pragmatic acceptance and may even be regarded as an undesirable manifestation of financial capitalism.

Read more

• Pension policy in the European Union in the 21st century (Julkari.fi) 
• Understanding Finnish Pensions (Julkari.fi)