Prefunded pensions in Denmark, the Netherlands and Sweden pair income security with fiscal sustainability, but other EU countries need a faster route.

This paper examines whether the pension systems of Denmark, the Netherlands and Sweden outperform predominantly pay-as-you-go (PAYG) systems, and whether their development provides a replicable reform path for other European Union countries. 

We find that Denmark, the Netherlands and Sweden have developed multi-pillar systems combining public pensions with large, prefunded components. These systems deliver comparatively high final-wage replacement rates and low old-age poverty, while limiting long-term fiscal pressures and supporting higher national savings, deeper capital markets and the supply of long-term risk capital. The experience of these three countries demonstrates that a substantial shift towards prefunded, predominantly defined-contribution pensions need not undermine retirement income security and can strengthen long-term fiscal sustainability. 

However, other EU countries will struggle to replicate the historical transitions seen in Denmark, the Netherlands and Sweden. In the three countries, prefunded pension assets accumulated gradually over decades, supported by favourable demographic and economic conditions and strong social-partner institutions. EU countries now facing rapidly ageing populations and strained PAYG systems no longer have such favourable time or circumstances. Rather than replicating this historical transition, countries with sufficiently sound fiscal positions could accelerate the shift towards prefunding, including through public debt-financed initial contributions to individual pension accounts of 20 percent to 25 percent of GDP. Such a kickstart would rapidly build meaningful pension assets, change savings incentives and help develop the institutional capacity required for sustainable prefunded pension systems.

Source : Bruegel