Part 2: European pensions - why occupational pensions are the lever

The 3 advantages of occupational pensions 

• They are employer-managed. Automatic enrolment ensures effective savings. Employees don’t need to take action themselves. 
• They focus on long-term investment. A 30- to 40-year horizon enables equity and venture capital investments, delivering higher expected returns than traditional savings accounts. 
• They offset declines in statutory pensions. The European Commission projects that supplementary pension schemes will partially compensate for the falling replacement rate. 

Countries with the most diversified pension systems, such as the Netherlands and Anglo-Saxon nations, rank highest on the Ageing Vulnerability Index. Their resilience stems from reduced reliance on public budgets to shoulder demographic ageing costs. 

Why the second pillar is missing 

Why is the second pillar¹ so underdeveloped across most of Europe? Only 1 in 5 Europeans accumulates an occupational pension, and just 18% have a private pension. For decades, supplementary pensions seemed unnecessary because statutory pensions carried the burden. Additionally, many pension funds are too small to operate efficiently: 4 out of 5 manage less than €1 billion in assets. 

Moreover, the capital held in occupational pensions is invested conservatively. In Belgium, employers must guarantee a minimum return of 2.5%, discouraging equity investments that could yield far higher average returns. In Germany, 40% of occupational pension liabilities consist of book reserves - companies promise pensions but don’t segregate the funds, keeping them within their own operations. German pension funds allocate just 10% to equities. European households hold only 17% of their financial assets in securities, compared to 43% in the US. 

¹There are 3 pension pillars. The statutory pension (first pillar) is paid by the government. An occupational pension (second pillar) is built up through your employer, via a group insurance policy or a pension fund. A private pension (third pillar) is saved individually, for example through pension savings or the Pan-European PEPP.

How Europe is addressing the situation 

Europe aims to change this with measures for each pillar: 

Occupational pensions 

• The IORP II pension fund directive is being revised to promote greater scale and allow more equity investments. 

Private pensions 

• The Pan-European Personal Pension Product (PEPP) will remove its 1% cost cap and simplify procedures. 

Cross-pillar initiatives 

• Automatic enrolment in supplementary pensions for employees, with an opt-out option. 
• A pension tracker for all citizens to monitor their total accrued pension and potentially increase savings. 
• Clarification of the prudent person principle to avoid discouraging equity investments. 

The Finance Europe label 

7 member states also launched the Finance Europe label. This applies to general savings products, such as investment funds, insurance-linked products, and investment accounts—not specifically pensions. The criteria require at least 70% investment in European companies (listed or unlisted), no state guarantees, and a minimum 5-year holding period. The reports by Letta and Noyer also focus primarily on individual savings products, though Noyer proposes automatic enrolment for employees via their employer. 

However, Europe can only guide, not mandate. Taxation and labour law remain national competencies, and automatic enrolment is merely a recommendation. The UK example demonstrates what is achievable: after 6 years, private-sector employee participation in employer-facilitated pension savings rose from 42% to 86%. This reflects increased participation, not necessarily higher payouts—building a full pension still requires a complete career. Yet any member state attempting this faces the same fundamental challenge. 

Who foots the bill? 

There are 3 options: employers pay more, employees defer part of their salary, or governments offer tax incentives. In practice, it will likely be a mix but each option carries weight. In Belgium, labour costs are already high. Large companies often provide solid occupational pensions, but coverage remains limited for SMEs and the self-employed. The goal of ensuring every worker builds a supplementary pension has been pursued for years yet remains unmet. Contributions are generally too low. 

A well-known proverb sums up the dilemma neatly: "The best time to plant a tree was twenty years ago. The second-best time is now." Those who fail to act today will face a pension cliff in 20 years - a generation realising their state pension falls short and no supplementary savings exist. The transition will be difficult and slow. That is precisely why it must start now. 

The benefit is twofold. Citizens build a pension to offset declines in the first pillar. And Europe activates dormant savings as risk capital for its own economy. 2 problems, 1 lever.