Europe’s pension systems mind the productivity gap

Europe’s pension systems are under scrutiny like never before. In November 2025, the European Commission announced legislative proposals to review the IORP II Directive – governing occupational pensions – and the PEPP Regulation, which covers European personal pension products.

To analyse the current situation, the Association of the Luxembourg Fund Industry (ALFI) has commissioned a comprehensive study with the University of McGill into pension systems in Europe and elsewhere. 

The report compared four European economies with reformed, capital-based systems (Denmark, Finland, the Netherlands and Sweden); two successful reformers outside Europe (Australia and Canada); and three major European economies still dominated by pay-as-you-go (PAYG) pensions (Germany, France and Luxembourg).

Interestingly, the study revealed how capitalised pension systems hold, following reforms, two to three times more financial assets than those in traditional PAYG countries such as France and Germany. The report further showed that, on average, each worker in countries such as Sweden, Canada and Australia sits on €209,000 in financial assets – compared with just €66,000 in Germany and €91,000 in France.

Based on these parameters, it is estimated that France and Germany could have built an extra €10trn in investable capital/pension savings that, in turn, could have powered innovation, infrastructure and long-term growth across Europe.

Fundamental differences between EU pension systems

Europe’s north – Denmark, Finland, the Netherlands and Sweden – has built deeply capitalised pension systems while France, Germany and Luxembourg remain anchored in public PAYG systems.

In Denmark and Sweden, public pension funds have become among the world’s most sophisticated investors. In the Netherlands, quasi-mandatory occupational schemes collectively manage assets exceeding the country’s annual GDP.

While Germany’s reserves cover barely six weeks of pension payments. France’s social welfare system, built on intergenerational transfers, holds far less investable capital than its demographic weight might suggest. Luxembourg, despite high income levels, sits somewhere in between, with a generous state pension but limited funded assets. 

The study found that uncapitalised systems are often more expensive. Germany and France channel roughly 20-25% of gross income into public pensions, compared with 18% in capitalised economies. Yet the outcomes are weaker: smaller asset pools, lower returns and heavier future liabilities. 

In Sweden, the average worker holds €332,000 in financial assets, 75% of which are invested in risky assets. Germany’s workers, by contrast, hold about half that amount – and invest less than half of it in equities or comparable instruments. Higher contributions grow faster in equity portfolios; the resulting wealth generation, it is argued, fuels confidence in markets and supports broader participation.

This connection between pension structure and household behaviour is one of the study’s most striking findings. As pension funds become more active investors, they also act as conduits of financial education. Swedish households, for example, are among Europe’s most financially literate and exhibit some of the highest rates of retail stock ownership. Denmark and the Netherlands show similar patterns.

Lessons learnt from reformers

The report focused on three reform champions: Canada, Australia and Sweden. Each found a different path to the same destination – a broad-based, well-governed pool of long-term capital.

Canada began its transformation in the 1990s. Faced with looming insolvency in its public pension plan, Ottawa created the legally separate Canada Pension Plan Investment Board, which now manages more than C$600bn (€370bn).

Canadian pension funds have since become global powerhouses, renowned for their direct-investment model, internal expertise and disciplined governance. They invest heavily in infrastructure, private equity and sustainable assets – the so-called “maple model”.

Australia’s story is different but equally instructive. Its “superannuation” system – a mandatory occupational savings scheme launched in 1992 – channels 11% of every worker’s wage into individual accounts managed by large, competitive funds. The structure blends compulsion with choice: employees can opt for additional “salary sacrifice” contributions, and most default into diversified, equity-rich portfolios.

Over time, Australia’s super funds have consolidated, gaining scale and sophistication. The result is one of the world’s largest retirement capital pools – more than A$3trn (€1.7trn) – underpinning both domestic markets and global investments.

Sweden pursued a hybrid path. Reforms in the late 1990s created a premium pension system – a fully funded, defined-contribution plan layered atop the universal public pension. Citizens could select among hundreds of funds, but most opted for the government’s default AP7 – a low-cost, globally diversified equity fund that has become a quiet national success story.

Despite the contrasts, the three systems share six ingredients: scale, efficiency, governance, coverage, portability and incentives. Together, they form the architecture of capital accumulation.

The right mechanisms

The challenge is to find the right mechanisms to channel savings into productive investments that people actually trust. The study found two possible routes:

• a pan-European “super-default” fund, modelled on Sweden’s AP7 or the UK’s NEST that employers could join voluntarily;
• opt-in employer gateway platforms that pool contributions across companies and countries, giving savers access to diversified, low-cost portfolios 

Both would open the door for millions of workers – especially younger, mobile ones – to invest in long-horizon, equity-based funds without needing to navigate complex financial decisions. Tax incentives and voluntary top-ups could amplify participation, just as “salary sacrifice” schemes have done in Australia.

The message is clear: Europe’s pension architecture can make use of the productive capital that EU citizens save or remain as it is. The choice is between remaining a continent of savers – or becoming once again a continent of investors.

David Zackenfels is senior vice president, legal affairs, at the Association of the Luxembourg Fund Industry (ALFI)