Private Pensions for Europe
European Capital Markets Need Private Pensions
The paper written by Lans Bovenberg and Casper van Ewijk argues that a larger role for private funded pensions benefits the European capital market, stimulates the internal market for pension services and enhances international and intergenerational risk sharing. A deeper European capital market allows for better diversification of country-specific risks and facilitates economic growth.
Furthermore, the authors suggest that the European Union member states and the EU institutions should facilitate this development, through open coordination supported by proper regulation of pension markets at the EU level. Bovenberg and Van Ewijk note that European pension systems are in deep crisis due to a toxic mix of ageing populations, the financial crisis and poorly functioning labour markets. This badly affected all pensions, in particular public Pay As You Go systems (PAYG) and corporate defined-benefit pensions. Funded private pensions can help to keep up old-age incomes, as they are less dependent on the public finances. They can also foster a better allocation of risks between citizens and member states. EU regulation of pension funds should not focus on requirements to guarantee safe pensions, but rather stimulate funds to share risks efficiently among participants and mandate funds to communicate risks transparently to individuals.
The authors argue that mandatory participation in private-pension plans helps to overcome problems associated with voluntarily schemes, such as lack of commitment on the part of the contributor or the selection of the least risky members by pension funds suppliers. Private capital based pensions are good complements to public PAYG systems and attractive alternatives to other forms of pension.
About the authors:
Lans Bovenberg is a professor of economics at Tilburg University and founder of Netspar, the Network for Studies on Pensions, Aging, and Retirement.
Casper van Ewijk is a professor of Macro Economics at the University of Amsterdam, Deputy-Director of CPB Netherlands Bureau for Economic Policy Analysis and a Netspar research fellow.
About CPB: CPB Netherlands Bureau for Economic Policy Analysis is the Dutch fiscal policy council. Founded in 1947, it conducts scientific research aimed at contributing to the economic decision-making process of politicians and policymakers. For more information, see our website www.cpb.nl
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Private funding of pensions creates a more integrated European capital market and internal market for pension services. Pension funds should embrace risks in order to be able to build good pensions at reasonable costs. EU regulation of pension funds should therefore not focus on requirements to guarantee safe pensions, but rather should stimulate funds to share risks efficiently among participants and mandate funds to communicate risks transparently to individuals. Mandatory participation in stand-alone pension funds can provide the necessary commitment for better intergenerational risk-sharing. These stand-alone funds can play an important role also as trusted partners for financially illiterate consumers. The scale and type of collectives vary with the specific institutional setting of each European country. To facilitate tailormade solutions for market imperfections and behavioural issues, the EU should allow for mandatory participation and other constraints on free competition in the market for pensions.