Looking back over 10 years, remarkable changes have occurred across the landscape of European pension and retirement income provision. Remember what was once said about European commitment to nation-state social insurance systems: the welfare state would persist and with it the institutions and inefficient funding practices that marked continental Europe different from so much of the Anglo-American world.

Most importantly, it was expected that the introduction of the single European currency on top of enormous unfunded nation-state pension liabilities would bring into play the very future of Europe as a viable global economic powerhouse. At the same time, US and UK commentators congratulated themselves for creating sustainable pension and retirement savings systems that seemed to have solved once and for all the funding of supplementary pensions (so essential in topping up modest state pension benefits).

Ten years ago, it seemed that the lessons to be learnt about the provision and funding of pensions and retirement income could only come from the Anglo-American world. Having been to many conferences on the topic over the past decade, the level of self-belief embodied by Anglo-American financial interests was such that it seemed that they alone had the solution if only people would listen and learn.

This arrogance would not be credible today. Lost at the time were arguments to the effect that even if supplementary pensions were vital ingredient for Anglo-American pension systems, there seemed to be every prospect that a significant number of working people in the UK and the US would be very poor in retirement.

Also lost at the time were arguments, or were they queries, about the health of Anglo-American defined benefit (DB) pensions and whether there were sufficient safe-guards in place for pension benefits to be realised when the promises came due. Both topics are now squarely at centre stage in Anglo-American policy debate.

At the same time, it was widely recognised that the nature and significance of supplementary pension assets in the Anglo-American world had contributed to the development of financial markets and instruments that had undermined the long-term standing of continental European banking systems. Elsewhere, I have charted the rise of Pension Fund Capitalism suggesting that the transformation of Anglo-American financial systems owes a great deal to the decentralised and private management of pension assets governed by fiduciary duty and light-touch regulation.

At the time, there was considerable debate about the role and significance of national financial centres in relation to London, and the premium on financial innovation affecting not only the global flows of financial assets but also inherited systems of corporate capitalism. There seems little doubt, on this score, that these issues have only become more important over the intervening years.

London has won a place at the very heart of European finance, underpinned by continental financial institutions that rely upon it for executing many of their global investment functions.


Over the past 10 years there have been some notable surprises. Who would have predicted that in the aftermath of the late 1990s bubble and bust British DB pension plans would rush to close to new entrants while radically altering their investment programmes in favour of fixed income products such as government bonds?

Who would have predicted the imposition of new regulations guaranteeing pension promises leading, paradoxically, to the accelerated closure of these institutions in the private sector?

Remarkably, the development of national and international accounting standards designed to make more transparent to financial markets the value of long-term pension obligations carried by private sector plan sponsors have had the effect, at least in the UK, of driving plan sponsors away from an institution of which they were once so proud.

On the continent, who would have predicted that the German government would introduce tax incentives designed to encourage individuals and institutions to develop supplementary pension savings?

Who would have predicted that this initiative would have been slow to start but, on recent trends, increasingly successful as many people seek to take advantage of this scheme?

Who would have thought that innovation on this score, at least, would be found on the continent and not in UK or in the United States of America?

In the UK, plan sponsors were very much aware of the dangers posed by each step in the tightening of regulations. Arguably most important in this respect was the Chancellor's (1997) change in regulations to require pension funds to index pension benefits and the removal of tax credits on share dividends. Both changes prompted protest, though muted somewhat by the run-up in stock markets.

In the aftermath of the 1990s bubble it became even more obvious that these two changes in regulations would have far-reaching effects on the sustainability of private pensions. If plain to those knowledgeable about the industry, sector protestations have been ignored.

Who would have thought 10 years ago that UK government would have been so ambivalent about supporting an institution that was once deemed so valuable (compared to continental Europe)? Perhaps the writing was on the wall 20 years ago when the Thatcher government sought to encourage workers to opt-out of occupational pensions and take their chances in the market for financial services.

Looking forward over the next 10 years carries with it certain risks: where we might assume things will remain as they are, for good and for bad, continental Europe has shown a capacity for institutional and policy innovation that few Anglo-American commentators believed possible.

Where we might have expected to see continuity in Anglo-American private pension provision, government policy combined with the increasing financial transparency of pension obligations and market volatility have undercut institutions once thought essential to retirement income.

Here, the Pensions Commission chaired by Lord Turner has set in motion a policy framework for the UK that is bound to dominate debate over the next 10 years.

Though charged with securing the future of occupational pensions, the Commission has promoted something quite different: a National Pension Savings Scheme (NPSS) that would be not just a vehicle for low-income workers to save for retirement but a long-term alternative to employer-sponsored pension plans.

If implemented over the next decade, the NPSS could effectively nationalise UK private pension savings.

The NPSS could be a very shallow organisation in that it might be just a system of individual accounts with administrative, custodial, and investment functions provided on contract from the private sector. How that will be governed and maintained remains to be seen; but it seems unlikely at this juncture that it will have the decentralised and competitive structure of the Australian mandatory defined contribution system.

Looking forward, it is entirely possible that the NPSS will promote the worst of worlds: relatively low rates of contribution (against what is needed in terms of income replacement rates), low costs and fixed tariffs for separate functions (reducing the incentives for innovation by service providers), limited investment options (perhaps generic cash, bond, and equity options).

This is at a time when public securities markets are undergoing a profound transformation in terms of how and where to reap superior rates of return, and a level of risk aversion on behalf of government that effectively narrows the scope of possible returns to AAA bond rates (on the low side) and the FTSE100 index (on the upside).


If this model of UK individual pension savings comes to replace employer-sponsored pension plans over the next 10 years, net retirement savings per head are likely to fall and will be balkanised into segments of the London financial market that no professional investor would deem appropriate for their clients.

It is ironic, then, that looking forward over the next 10 years brings us to a point where the gap in supplementary pension savings between the UK and continental Europe will be a gap to the advantage of continental Europe not the UK.

Indeed, if Dutch and German pension institutions continue to evolve and adapt to global financial opportunities as seems possible by recent developments, in 10 years time we will look back on the failure of UK policy as a failure of commitment and a failure of imagination.

In that case, financial innovation may be located in London but its demand will come from continental Europe not the UK economy.

If so, in 10 years time, the average UK citizen will be doubly poorer: for the low premium on their retirement savings and for the lost opportunity to be at the leading edge of global financial market innovation in public and private investment.

Gordon L Clark is a professor at the University of Oxford, specialising in the design of pension systems at the interface with global financial markets. He is the author of Pension Fund Capitalism (OUP 2000), and the co-author of the forthcoming The Geography of Finance (OUP 2007).