Plugging Europe’s investment gap: understanding the potential of leveraging institutional investors

Expanding funded pensions via auto-enrolment could boost long-term investment and saver security, allowing the EU to address its investment gap.

The European Union faces a significant investment gap. Meanwhile, an ageing population is putting pressure on the EU’s predominantly unfunded pension systems. Insurance companies and pension funds sit at the intersection of these challenges: as long-term investors, they can help close the investment gap while supporting the sustainability of pension systems through funded savings. 

An analysis of geographical bias shows that the insurance and pension fund sector exhibits a preference for investing within the EU, particularly in debt markets, and underinvests in US markets relative to their size. This challenges the narrative of excessive EU savings outflows. We also explore how a shift of household savings from cash and deposits into insurance companies and pension funds could channel savings into EU capital markets, finding that (under current investment patterns) a one-time reallocation of 10 percent of household savings from deposits to the insurance and pensions sector could generate €416 billion of investment in EU capital markets. 

The most promising approach to effectively mobilise household savings would be to expand funded pensions through auto-enrolment. While pension reform is a national competence, the EU can promote best practices and improve capital market integration. However, any reform aiming to increase investment within the EU must keep the interests of savers at the centre. Ultimately, the goal should be ensuring the financial security of EU households, and any potential better alignment between long-term savings and long-term investment needs should be a positive side effect. 

Source : Bruegel