In the latest edition of the monthly FECIF Editorial, John Mitchem, co-founder of Jasper Forum sets out the global retirement finance-centred findings from four Jasper Roundtable discussions held in June this year in Paris, London, Copenhagen and Rotterdam, their first-ever live events.
“Here’s what we heard in Europe”, he comments.
1. Global Ageing
Global ageing is second only to global climate change as a driver of systemic change. In Europe, increasing life expectancy and declining fertility are conspiring to collapse the “support ratio” – roughly the ratio of current workers to current retirees. This in turn places pressure on retirement systems, particularly publicly-funded pensions that have played such a critical role in Europe over recent generations.
This unalterable fact means that governments must not only contend with increased numbers of retirees, but deficits in the labour force. After years of “parametric adjustment” – raising retirement ages, altering inflation assumptions, increasing contribution rates – governments are looking for new solutions.
2. The Four Horsemen of the Middle-Class Apocalypse
All over the world we find endorsement of our Jasper Forum concept of the “Four Horsemen” – housing, healthcare, education and retirement. In countries all over Europe (and the world), increasing longevity and monetary policy have conspired to push all four toward becoming “luxury goods”. Workplace savings programs help to mitigate stress on all four priorities, ensuring that they don’t compete with each other.
3. Pooled Retirement Risk
Europe has long taken a collective approach to retirement security. In countries like Germany, France, Italy and Spain, pay-as-you-go government social insurance schemes dominate. In the Nordics, mandatory workplace contributions to defined benefit (DB), defined contribution (DC) or collective defined contribution (CDC) schemes cover nearly all the labor force. The big idea: everyone in the society should be able to achieve financial security in retirement. The problem: global aging is making this more expensive by the year. Whether the solutions are public or private, they should “pool” benefits and risks …and they must be sustainably funded.
4. Stakeholder Engagement
Effective retirement systems emerge from deep collaboration between multiple stakeholders – elected officials, regulators, employers, employees, trustees and financial services firms. Governments set policies and provide safety nets; employers offer pension funds and DC savings plans; financial institutions manage funds, trustees oversee governance; and employees fund the system from their wages. Celebrated and well-funded retirement finance systems do not rise by spontaneous combustion – they are forged in shared responsibility and aligned incentives.
5. Control & Responsibility
There is a growing trend towards shifting the responsibility for retirement finance from governments and employers to individuals. This shift is seen in the move from defined benefit (DB) pension plans, where employers guarantee a specific retirement benefit (but retirees own no assets), to defined contribution (DC) plans, in which individuals share investment risk and responsibility for “owned” assets. Collective Defined Contribution (CDC), long-established in Denmark and emerging in the Netherlands lies between the two, at the DB end of the spectrum.
European retirement systems are pushing hard in the direction of participant responsibility, but while the best systems (notably the Nordics) are superbly managed, they have no experience with retail consumer engagement that is the center of gravity with DC systems. The new individual-centric systems will turn on auto-enrollment, auto-allocation and interactive fintech for account management and retirement income projection.
6. Fintech & Personalization
New technologies are transforming the management and delivery of retirement services. Mobile-based platforms allow individuals to manage their retirement savings. Artificial intelligence (AI) and personalization technologies can provide tailored advice, automate investment decisions, and improve user engagement. These innovations can increase accessibility, reduce costs, and improve the overall efficiency of retirement systems. European retail retire-tech lags behind the United States for the moment; it will catch up fast.
7. Public & Private Markets
Modern Portfolio Theory (MPT) holds that a broad array of investment assets is essential to the optimization of returns and risk. Funded retirement systems in the Nordic countries have a full array of publicly traded stocks, bonds and indices, together with private equity, private credit, infrastructure, real estate, and other assets. The US DC savings complex is almost entirely allocated to stocks and bonds, posing substantial concentration risk. In coming years, US allocation will increasingly mirror the Nordics.
8. ESG is Here to Stay
In the US, ESG seems to have fallen out of fashion due to a blend of political pressures, a renewed focus on returns and general portfolio rebalancing. But in Europe, the principles of sustainable investment seem permanently embedded into the DNA of pension funds. The “Green Transition” and the “Digital Transition” are central to European strategic thinking and likely to stay that way.
9. Capital Markets Union (CMU)
For some years, European policymakers have unsuccessfully pursued Capital Markets Union (CMU) that would establish a unitary, deep and liquid pool of capital on the scale of the United States. The US has a vast capital market that reduces systemic cost cost-of-capital; the country’s $40 trillion retirement finance complex is the heart of this market. But European CMU remains elusive. The member states of the European Union still reserve for themselves the right to legislate and regulate on matters of pensions, tax and finance. European governments well-understand the potential benefits of funded retirement finance and CMU. But for the moment this goal remains politically out of reach.
10. Culture & Trust
Culture – historic, social, political, economic – is the DNA of the global retirement finance system. Culture’s cousin “trust” is similarly determinative. And while these concepts can’t be rendered on a spreadsheet, they are all-important. In Europe, a history of military conflict and serial capital destruction, described memorably in Thomas Piketty’s “Capital in the 21st Century” has left a lingering deficit on both fronts.
The Nordic countries are “all-in” on funded retirement finance. Workers seem well-content to defer substantial portions of their wages to local pension funds. And Nordic retirement systems are routinely cited as the best in the world. In large European countries like Germany, France, Italy and Spain, governments ask that workers make equally significant retirement contributions – in the form of social security tax payments.
In addition to these retirement finance contributions, European personal savings rates hover around 10% as compared with 5-7% in the United States. But Europeans tend to allocate to low-return, guaranteed instruments like insurance products and bank deposits and in real estate. By some estimates EU “assets for retirement” (as opposed to “retirement assets”) may top €10 trillion. Truth be told, Europeans don’t have many other options. American style brokerage accounts, DC savings and fund supermarkets are not deeply imbedded in financial practice.
There is no “European” financial culture, to say nothing of a unitary investment market. Instead, Europe has 27 different financial cultures. Many cite this as a semi-permanent barrier to retirement finance evolution. Others believe that preoccupation over Europe’s under-developed financial culture may be a stalling tactic designed to delay long-overdue changes
From Crisis to Opportunity
European policy-makers often frame demographic and financial challenges as a “retirement crisis”. But in Europe today, there is also a growing recognition that retirement finance represents an opportunity for innovation and economic development. An older generation of Europeans seems intent on preserving the status quo, (even as they recognize its looming unsustainability). Younger Europeans seem eager to engage whatever private savings mechanisms are available to them.
The European Union has a GDP of $20 trillion. Regional funded retirement finance assets comprise some $4 trillion – over 90% of which are in the Nordic countries. Were the EU as a whole to achieve a retirement-assets-to-GDP ratio of 100% (the Nordics are already closing in on 200%), Europe would be showered with a $16 trillion windfall of retirement investment, across a wide diversity of financial assets, with a 40-year investment horizon.
Retirement finance could be a primary capital source for Europe’s “green transition” and “technology transition”. Funded retirement finance would do far more than shore up the continent’s social benefit programs. It could re-define the EU economy for the 21st Century.
By John Mitchem, co-founder of Jasper Forum
