European Commission IORP proposals are too slanted to individual pensions

European countries face a fast-accelerating ageing crisis as low birth rates and retiring baby boomers increase pressure on pay-as-you-go pensions, health care and long-term care. That insight is not a new one. Increasing retirement ages can help considerably, but it is not easy to achieve due to social concerns. An alternative solution could be to increase the provision of funded pensions.

In parallel, the European Commission’s new Savings and Investment Union strategy has a different primary objective: achieving economic competitiveness by meeting Europe’s major investment needs, estimated at €750-800bn in the Draghi report. It is with this objective in mind that the Commission presented its supplementary pensions package last week, seeking to mobilise private savings by strengthening capital markets and expanding funded pensions.

The recently promoted ‘Rhineland model’ of occupational pensions also provides for this objective, acknowledging that occupational pensions are not just financial instruments but core components of social protection and economic stability.

The Rhineland model derives its strength from a paritarian set-up and governance, where social partners act jointly and in the best interests of members. Proven examples, for instance in the Netherlands or in the German construction sector, demonstrate the ability to organise large collectives, amass a large volume of pension assets, and invest them strategically in long-term, illiquid but high return asset classes like infrastructure.

The Rhineland model emphasises solidarity and collectivity, pooling risks and resources across large groups, and relies on long-term planning and prudent, not-for-profit management to ensure stable and adequate retirement incomes. It is therefore better suited to balance economic and social objectives than individualised, market-based Anglo-Saxon pension systems. 

“The details of the IORP II review proposal still structurally reinforce an Anglo-Saxon model”

Rhineland model alignment… 

The European Commission’s proposal for a pension package emphasises a few core ideas of the Rhineland model. It recognises systems “developed in dialogue with social partners”, and emphasises intergenerational solidarity as well as long-term investment horizons, reinforcing the need for long-term return objectives.

In particular, the Commission’s stated ambition to broaden occupational pension coverage via automatic enrolment can help create large investment pools without compulsion. This would be most useful where social partner models and occupational pensions do not yet exist, or where participation is voluntary for individual workers.

Where there are already well-established occupational pension systems with compulsory participation or means to achieve high coverage, the ‘opt-out’ of classic auto-enrolment can lead to undesirable outcomes, as we see in Lithuania.

…and misalignment

A central part of the Commission’s pension package is a review of IORP II proposal. Here, the package diverges meaningfully from the Rhineland model by embedding a strong market-driven, individualised logic. It repeatedly frames pensions as individual entitlements, uses consumer terminology, and emphasises provider competition.

It also misrepresents the shift towards defined contribution (DC) schemes, claiming it places “greater financial risk on members and beneficiaries”. This contradicts the Rhineland commitment to collective buffering of risks, which is still possible within a collectively organised form of DC.

The Commission diverges from the Rhineland model in several ways. First, the proposal treats participants as consumers who have choice. More detailed information, for example, on costs, returns and potential underperformance against a benchmark, will not help participants get a better grasp of their pension situation, and they cannot act upon the information. Instead, transparency on these elements is relevant, but at the level of the social partners.

Second, by introducing various consumer protection elements, the proposal ignores the value of the paritarian governance model in aligning the interests of the pension fund with its participants. IORPs are increasingly treated as just another type of financial institution. Legislative and supervisory requirements that are relevant for individual and personal pension products should not be unduly transferred to IORPs.

Finally, third pillar products can fulfil a role where a second pillar is absent, but the introduction of pan-European Personal Pension Products (PEPPs) should not inadvertently undermine well-functioning occupational pension systems. Centred on individual accounts, personal responsibility and competition among financial providers, the PEPP and other such products are less suited to meeting the dual challenge of pension adequacy and European investments. Promotion of personal pension products like the PEPP is therefore mostly relevant where no social partner models exist.

In sum, while the proposed package fits reasonably with Rhineland principles, the details of the IORP II review proposal still structurally reinforce an Anglo-Saxon model, potentially eroding the social resilience that collective occupational systems provide. This may be because the most important steps must be taken at the national level, by governments and social partners. At the EU level, this can be encouraged in many ways, for instance via the European Semester – but not enforced.

In German folklore, a beautiful maiden lures sailors to their deaths at the River Rhine’s perilous Lorelei rock. As a helmsman, the Commission has been lured by the siren songs of a modern free-market Lorelei. Member states in the European Council, together with the European Parliament, must keep our little ship of good pensions afloat.

Peter Gramke is an independent consultant and policy adviser for German pension funds. Johan Barnard is head of international public affairs at the Dutch pension provider APG