The study, from McGill University and ALFI – or , said Europe’s economy has fallen further behind the US and China in productivity, capital formation, and technological and business innovation in recent decades. Between 2002 and 2023, the gross domestic product spread between the US and the EU nearly doubled, from 17 per cent to 30 per cent.

“A key driver is the shortage of long-term risk capital – equities, private markets, infrastructure. Europe’s pension systems rely heavily on the pay-as-you-go (PAYG) social security systems, limiting investable assets,” Augustin said.

As a result, Europe’s funded pensions are smaller and allocate less to risky financial assets than those in leading pension markets. Starting in the 1990s, countries such as Australia, Canada and Sweden, launched structural reforms to transition their pension systems from PAYG regimes to partly capitalised regimes, responding to demographic pressures that threatened the long-run solvency of their pension systems. “Three decades later, these countries emerge as positive examples for successful pension reforms,” Augustin continued. 

The study examines how much risk capital these countries have accumulated after 30 years, and how their financial wealth compares with countries that continue to operate as PAYG regimes. It compares the stock of risk capital across nine countries, namely Denmark, Finland, the Netherlands and Sweden and three European countries that PAYG pension systems – Germany, France and Luxembourg – as well as Australia and Canada. From this analysis, it highlights six main takeaways.

For years, policymakers and asset management industry figures have sought to create in Europe the same large, liquid and relatively harmonised investment management and capital markets structure that exists in North America. For example, UCITS funds - designed to be bought and sold across the European Union without having to be separately registered in each member state, is an attempt to replicate the US market. A concern is that without changes, European savers aren't going to put more savings into corporate equities and boost growth. Europe is seen as equity-shy: A 2025 report by Observatoire de L’Epargne Européenne, on behalf of the AFG, the Employee and Retirement Savings Commission, notes that European households’ direct holdings of stocks are in single digits – just 6 per cent of total financial assets in the eurozone. Overall, the average holding of stocks by households in the euro area is 21 per cent of financial assets. 

The European Commission on 19 March 2025 adopted a Communication laying down a strategy on the Savings and Investments Union, aimed at connecting EU citizens' savings with productive investments in European businesses.

Details
In other points, the report last week shows how 30 years later, the divide in accumulated risk capital between capitalised and predominantly PAYG retirement systems is striking. Today, workers in a capitalised system – Canada, Australia, and Sweden – have about €209,234 ($243, 000) in risk-bearing financial assets on average. In comparison, figures are roughly €91,600 in France and €66,000 in Germany per worker. In other words, funded systems hold two to three times more risk capital per worker than PAYG-dominant peers. Had France adopted the path of capitalised systems, its stock of risk capital could now be €6.5 trillion rather than €2.8 trillion, the study reveals. For Germany, it could be €9 trillion instead of €2.8 trillion.

Second, the report shows that the substantial growth of risk capital in reformed countries stems from structural pension reforms implemented gradually over time. The case studies of Australia, Canada and Sweden show that capitalisation pension reforms were implemented slowly and gradually, with increased contribution rates and system design changes phased in over many years. This approach enabled governments to build political consensus, reduce transition costs associated with the reforms, and harness the power of compound returns over many decades.

Third, it also shows that countries with higher savings per active worker allocate a greater share of those savings to risky assets. This pattern appears both across countries and over time. For instance, Swedes hold about €332,000 in financial assets per worker – compared with €161,000 in Germany – and invest a much larger share in risk capital: 75 per cent versus 41 per cent, the study reveals. Over time, the combination of higher contributions and riskier allocations has compounded, driving stronger risk capital formation in capitalised regimes.

Fourth, exposure to risky assets through public and occupational pensions encourages greater risk-taking in voluntary household savings. The study documents a positive relation between (i) the stock of risk capital accumulated per worker in public and occupational pension systems and (ii) the households’ propensity to invest voluntary savings in risky assets. Evidence from Denmark, Sweden and the US shows that enrolment in defined-contribution occupational pension plans increases household stock market participation and risk-taking, thereby enhancing retirement wealth accumulation.

The study also shows different ways to accumulate risk capital. In Canada, for example, it has built a professionally governed public pension reserve, achieving equity exposure through strong governance and skilled investment management, while also offering tax incentives to encourage household investment in risky assets. By contrast, Australia has built a robust occupational pension system by combining mandatory defined contributions with default portfolio design and market consolidation. Sweden has scaled up equity participation broadly by funding the public pension system, expanding quasi-mandatory occupational coverage, and fostering voluntary equity market participation through tax incentives and financial education. Together, these case studies show that there is no single path to building risk capital, the study said.

Common drivers of risk capital accumulation are scale, cost-efficient investment vehicles, strong governance, broad coverage, portability and well-designed financial incentives. Despite differences in reform designs, clear commonalities emerge from the case studies, it said.

The study aims to learn from countries such as Australia, Canada and Sweden which, in the 1990s, transitioned their pension systems from PAYG to partly capitalised regimes. Three decades later, these countries have accumulated substantially higher levels of risk capital than economies that continue to rely heavily on PAYG models.

The scale of the challenge
In France and Germany alone, the risk capital gap with transitioned economies amounts to roughly €10 trillion. The large accumulation of risk capital in capitalised systems is the outcome of (i) gradual pension reforms that raised funded contributions, (ii) the power of compound interest over multiple decades, and (iii) greater tolerance for risky investments in funded accounts. It is clear from the different pension reforms studied that there is no single approach to risk capital accumulation. However, all successful approaches share common features: scale, cost-efficient investment vehicles, strong governance, professional asset management, broad coverage, portability and fiscal incentives, the study shows.

Augustin said any future pension reform in Europe should consider incorporating these factors. The pathways highlighted do so while preserving the employers’ administrative independence and the members’ choice. However, more research is needed to assess the feasibility of such pathways and their capacity to scale up Europe’s supply of risk capital.

Augustin believes that closing the capital risk gap would bolster Europe’s competitiveness, its capacity for innovation, and resilience. Pension reforms are not just about retirement adequacy, they are about Europe’s growth model.

See other coverage from the Luxembourg fund industry event last week here, and from earlier in the year, here.

(The main picture is drawn from the ALFI funds conference in Luxembourg, as mentioned above.)