NETHERLANDS - The EU and its member states should encourage capital-funded private pensions, as they can enlarge the capital market and the market for pension services, as well as improve risk sharing between the generations, two leading Dutch economists have argued.

Capital-funded private pensions will also benefit economic growth in the EU, said Lans Bovenberg, professor at Tilburg University, and Casper van Ewijk, professor at Amsterdam University and deputy director of the Netherlands Bureau for Economic Policy Analysis (CPB).

In their opinion, capital-funded private pensions should be stimulated through voluntary agreements between member states, in combination with EU-regulated pension markets.

Pension funds need to take investment risks to provide the best pensions against reasonable costs, Bovenberg and Van Ewijk said.

"Therefore," they added, "EU regulation should not force schemes to deliver a guaranteed pension, but encourage them to efficient risk-sharing and to transparent communication on the effects for individual participants."

They explained that the EU should take a back seat on enforcing free individual choice for pension provision because of the "institutional variety" for resolving imperfections on the pension market.

According to the economists, the role of private pensions needs to increase, as public pensions in Europe are in a deep crisis due to a "toxic mix of population ageing, the financial crisis and inefficient labour markets".

In their opinion, private pensions need reshaping into independent collective pension funds that do not "lean on" companies for financial support.

Mandatory and semi-mandatory participation will contribute to improved risk sharing between generations and prevent individual participants from making the wrong choices due to short-sightedness and financial illiteracy, they argued.

The character and the size of optimal collectivism will depend on the specific conditions in individual EU countries, they said.

Topics