A rather interesting, and potentially contentious, proposal in The Economist calls for Europe to unlock the power of pension savings to revitalise its economy and power innovation. The argument is that European capital markets are sorely underfunded and that pension funds could remedy this while boosting their own performance.
The magazine points out that European stock exchanges together amount to around 85% of gross domestic product compared to some 220% in North America. And Europe has an ageing populations and relatively poor company formation versus the US. So why not use pension money to bridge that gap by investing into long-term patient capital to support innovators?
Quoting from Morgan Stanley data, the magazine estimates that about US$2.58 trillion could be freed up for investment to drive European innovation and development.
Pension funds do benefit from diversifying across asset classes into longer-term capital to back entrepreneurs and innovation. But the past performance of such asset classes, like private equity, has not been that persuasive.
Long associated with high fees and lack of transparency, private equity has lately become less and less popular with investors for failing to deliver expected returns within a promised time frame.
The US, which has historically been associated with the highest pension fund investments into vehicles such as private equity and venture capital, is looking at mediocre pension adequacy at best.
The Mercer CFA Institute Global Pension Index 2025 rates US pension adequacy at C+. Sweden and the UK are rated B+ and the Netherlands gets an A.
In other words, the US pension system held up by The Economist as a model for Europe gets barely a passing grade in providing for pensioners.
Pension funds are there to pay pensions, not to finance innovation and industrial development.
Also, European capital markets may be smaller than North American peers, but does that fact have any necessary connection with pension investments? Perhaps combining European bourses would have a far more immediate beneficial effect.
If investment and innovation can be yoked to pension provision, great. But any pension fiduciary would be correct to very carefully consider such demands on the capital they curate.
