Quiet Pension Reform Revolutionizing Europe's Economy: Auto-enrolment Takes Center Stage

Europe's vast pool of household savings, amounting to trillions of euros, holds the key to addressing the continent's enormous investment needs. However, a significant portion of this money remains idle in low-yield bank accounts, according to a recent report.

The report, authored in part by Marie-Sophie Lappe, highlights the potential of redirecting a small fraction of these savings into funded pensions and insurers. This move could strengthen retirement security, fuel Europe's investment needs, and help bridge the investment gap.

Financial literacy campaigns are beneficial, but they are not the only solution. Default mechanisms like auto-enrolment, where workers are automatically signed up for funded pensions with the option to opt out, prove to be far more efficient. Auto-enrolment, while not flashy, could have transformative potential, but it should not be used as a piggy bank for political or economic projects.

The first duty of insurers and pension funds is to protect and grow people's savings. Any boost to Europe's investment gap should be treated as a welcome side effect, not the main goal. The underinvestment in the US from the EU, as found in the report, shows that there is actually an underinvestment in the US from the whole EU.

Europe faces investment needs for financing the green transition, upgrading infrastructure, and supporting innovation. The debate often centres on whether Europe is "losing" capital to the United States, but Europe's institutional investors are still home-biased and prefer to keep money inside Europe.

European institutions have invested their funds mainly in sectors such as defense, energy, innovation, and future technologies like semiconductors and artificial intelligence. The EU has also distributed substantial non-repayable support funds across member states and allocated billions for programs including REACT-EU, Just Transition Fund, rural development, InvestEU, Horizon Europe, and rescEU.

The report suggests that pensions and investment are two sides of the same coin. Europe's ageing population puts pressure on pay-as-you-go pension systems, while the continent faces huge financing needs. A funded pension scheme is a retirement plan where some of the money you and your employer pay in is saved and invested, rather than spent immediately.

Institutional investors, such as pension funds and insurance companies, manage huge pools of money and invest it in different financial markets. Shifting a small portion of this money into the ICPF sector could mobilize over 400 billion euros for investment.

In conclusion, the report underscores the importance of fostering a more integrated and efficient European capital market. The EU can play a supporting role in pension design, focusing on best practices like auto-enrolment, while ensuring that the first duty of insurers and pension funds remains protecting and growing people's savings.