This month sees European parliamentary elections and by autumn a new Commission will be in place. The political outcome and the composition of the new EC will influence the future shape of what still looks like quite an aspirational capital markets union (CMU) project. 

Editor's Letter, Liam Kennedy: “There is likely to be a growing gap between the citizens’ expectations for their retirement income and the reality of what can be afforded by social security systems”

Recent high-level reports by Enrico Letta, former Italian prime minister and Christian Noyer, former Banque de France governor, envisage the mass mobilisation of savings capital as a key component of the CMU project. 

Here we look forward 10 years and two full European political cycles to imagine how policy and practice might evolve in the value chain of pensions and long-term savings.

First, take workplace pensions. In a relatively bold scenario, imagine countries like France and Germany have moved ahead by the end of the 2020s with ambitious auto-enrolment policies backed by tax relief incentives and between them have created a sort of ‘Rhineland’ pensions model. 

This could form a policy template for other countries to crowd into  – either with ‘national champion’ set-ups or a diverse array of providers embedded in social and labour systems.

Second, take the CMU. Let’s create a cautiously optimistic scenario as our base case and imagine that key tenets of the CMU are enacted. One of these is a reshaped securitisation policy, which could reinvigorate the lending markets of Europe. 

This brings us to asset allocation in practice. Defined contribution (DC) auto-enrolment providers have become enthusiastic private market investors and private markets are a core component of most pension funds’ asset allocations. 

Third, by the 2030s, artificial intelligence (AI) and the rise of new technology has led to a ‘winners-take-all’ equity market that continues to be dominated by a small but dynamic set of companies. 

Pension funds have continued their shift to passive for most of their equity allocation. But the assertions of consultants and some asset managers about the virtues of active management have not been ignored. 

Funds across Europe have embraced the call to invigorate domestic capital markets by upping their game in internally managed active equity strategies, particularly in small and mid-caps. This has created a virtuous circle of capital flow and better corporate governance, reporting and research coverage in the sector.

Fourth, we can envisage the likely scenario in which there has been a pause on large ESG legislative initiatives. Corporates adapt to the new reporting paradigm, while large asset owners come together to create more clarity on sustainable-investing policy and there are clearer expectations of corporates, standard setters, issuers, asset managers and others. 

Fifth, if we imagine that the second half of the 2020s will see a ramping up of European defence spending, this ought to be backed by large pension investors across the continent. A virtuous effect here could be akin to the positive civilian technological spin-offs in the cold war.

Some of these scenarios are more likely than others. The key point is that pools of pension and workplace savings capital will need to grow and flourish.

Creating and expanding those potential capital pools is another matter. In reality, politics and realpolitik will mean that some of the scenarios sketched out here may remain out of reach.

In Germany, progress with DC pensions remains glacial. Moving ahead would necessitate overcoming the current disagreement about funded pensions, underpinned as it is by hostility on the left and within the trade union movement about workplace pensions. 

In France, it would take quite a leap of imagination to envisage a smooth social transition to mass auto-enrolment and funded pensions. 

But the experience of the UK shows that a national auto-enrolment policy can lead to high take-up and a rapid build-up in assets.

The next 10 years are likely to see social security budgets under strain, which will put first-pillar pensions systems under pressure. There is likely to be a growing gap between the citizens’ expectations for their retirement income and the reality of what can be afforded by social security systems. Decisive action and bold policy thinking will be needed to shore up pensions, a core component of Europe’s social compact.

But we can imagine a scenario in which some progress is made towards boosting funded pensions of various types and through various means tailored to national social and political systems. 

Then at least some of Europe’s vast stock of savings capital might be unlocked and set to work to meet the twin goals of sustainable retirement systems and invested at least in part in productive, future-orientated investment opportunities.

Liam Kennedy, Editor