Enrico Letta’s long-awaited review of the EU single market (Much More than a Market), reached inboxes last month. Among a sweeping range of measures, Letta advocates an ambitious system, akin to the 401(k) in the US, with an EU-wide auto-enrolment long-term savings policy as part of a proposed Savings and Investment Union.

Editor's letter May 2024

This is part of a grand vision to add a fifth element to the single market – encompassing freedom of research, innovation and education – in addition to the four freedoms of movement of people, goods, services and capital. These have been central to the single market since conception in the 1980s.

Letta recognises Europe’s bind in terms of long-term investment – private savings leach to the US because that is where opportunities lie – and he acknowledges the need for a more attractive investment ecosystem in the EU. 

His proposal for an EU stock exchange for deep tech to harness areas like quantum computing, AI and biotech gets to the heart of Europe’s problem with tech start-ups. Europe produces plenty of innovative startups but it does not have an equivalent to the NASDAQ when they want to list. Ideas, people and capital migrate to the US. Like much else in the report, this recommendation is highly ambitious.

Europe at least has the advantage of a huge stock of household savings (some €33trn). But much of this is invested inefficiently in low-yielding bank deposits (even if these accounts may now be offering a decent risk-free return).

And poor demographics means Europe’s population is ageing rapidly; much of the continent’s vast savings stock may implicitly be intended for retirement. In any case, it is likely to belong to older and more risk-averse individuals. Many EU countries have a barely existent long-term savings culture, with few tax incentives.

The EU has long pondered how to better channel long-term savings to productive investments, producing vehicles like the European Long-term Investment Fund (ELTIF) and the flawed but well-intentioned pan-European Personal Pension Product (PEPP). Indeed, Letta now suggests upgrading the PEPP to act as an auto-enrolment vehicle, and providing tax incentives for the ELTIF.

Despite a wealth of global experience with auto-enrolment, few EU countries offer it. Poland has perhaps the best EU policy template. It has seen steady growth in its PPK auto-enrolment plans, which reached a new milestone of PLN25bn  (€5.8bn) in AUM last month. 

However, the size of Poland’s working population has provided much of the tailwind behind the policy rather than any particular enthusiasm for long-term savings, and opt-out rates remain high. 

Letta’s auto-enrolment policy faces serious headwinds and his implementation target of 2025 is wildly over-optimistic. 

Decent tax incentives will be needed to make such a policy attractive. And it will not be possible to change European citizens’ risk aversion and preferences for bank deposits or bond funds overnight. 

The European elections, in which the far right could gain ground, as well as the make-up of the new European Commission, could both impact the direction of travel. And then comes the consideration of how the Commission would enact such a policy.

If it does see the light of day, significant policy fine-tuning on the ground will be needed to ensure success. These include the precise composition of default funds and tax incentives, as well as lump sum early withdrawal rules and the rules around the payout phase. Contribution rates are likely to be controversial and employers will doubtless push back against mandatory contributions from their side.

Fees will also generate a lively debate. Policymakers should learn from the PEPP fee cap, which is widely held to be too low for the product to be commercially viable. But fee caps should not be set in stone and should be reduced over time as the scale of funds allows.

Letta’s avoidance of the term ‘pensions’ is notable and politically wise: the proposal is centred on long-term savings rather than pensions, presumably to sidestep objections to interference in social policy, which is the prerogative of EU member states.

In reality, Letta’s auto-enrolment idea will need a significant coalition of support behind it and some real political heft before it can conceivably get off the ground – let alone in 2025. Even if enacted, unenthusiastic policymakers in national capitals could stall it.

Three other Letta recommendations – harmonising national interpretations of Solvency II to allow insurers greater freedom to invest in productive capital, reform of public-private partnerships and further facilitating bank securitisation – are likely to be easier wins.

Liam Kennedy, Editor