EUROPE – A new academic study has found that Economic and Monetary Union has improved the scope for change in European Union pension systems and the growth of institutional investors.

A paper on the growth of European institutional investors by E. Philip Davis, a professor of economics and finance at the UK’s Brunel University, argues that the "scope for change in EU pension systems as well as growth of institutional investors is enhanced by EMU".

Davis, who is a visiting fellow at the National Institute of Economic and Social Research, presented the paper at a European Investment Bank conference in Luxembourg.

He said there are a number of ways that EMU "will tend to accelerate the growth of institutional investment" – through deregulation – enhanced by the forthcoming Pension Funds Directive and an amended UCITS Directive.

Such sentiments are likely to find favour at the European Commission level. Internal markets commissioner Frits Bolkestein is on record as saying he sees huge benefits from the integration of the EU’s financial markets.

Davis says that the "EMU context" enhances pressure for reform of public pension systems. This will stimulate future demand for institutional investment. And the macroeconomic and financial conditions of the common currency also favour the growth of institutional investment, he says.

With monetary integration giving rise to lower inflation, Davis says it will be easier for defined benefit funds to finance inflation indexation. And pension benefits from defined contribution plans will retain their purchasing power more easily.

In addition, institutions’ costs are falling due to increased liquidity and lower transaction costs, Davis says. The launch of the euro has led to increased competition amongst asset managers "with those having pan-euro-zone expertise having a decisive advantage".

Davis sees the focus of the Continental European financial system shifting towards an Anglo-Saxon model. "This will necessitate considerable adaptation by regulators and market participants alike," he concludes.


Davis also recognises that the dominance of pay-as-you-go pensions and the "lack of sustainability of current systems" mean there is arguably more scope for the expansion of private pension funding and institutional investment in Continental Europe than in the more mature UK and US markets.

"Pension saving is likely to increase sharply over the next 20 years as individuals seek to provide for their retirements following pension reform in pension funds, or as precautionary saving in life insurance and mutual
funds," Davis notes.