On the surface, at least, continental Europe appears to hold great promise for asset managers, particularly those offering products and services to defined contribution (DC) pension plans.

Occupational pensions in much of Europe are severely underfunded, state retirement promises seem likely to strain governments severely some time soon and all parties are seeking funding solutions that define contributions, rather than benefits, to avoid open-ended liabilities.

Research recently undertaken by InterSec, as part of a detailed analysis of DC arrangements in 52 countries, shows that DC assets in continental European countries are projected to grow at 14% annually - almost twice the rate of defined benefits (DB) assets - from some $205bn at the end of 1995 to $520bn in 2002.

DC is an issue being considered and addressed at the highest levels in all European countries, and it is arguable that its growth is largely being driven by governments - either directly or indirectly. Indirectly in Switzerland, for example, where changes to vesting regulations, brought in to reflect increasing mobility in the labour market, have made DB schemes less attractive to plan sponsors. Directly in Italy, where the new private pensions legislation requires DC plans.

The growth in DC asset base is part of a global phenomenon and plans in the US have set the trend. This has led to US DC being regarded as a prototype - the end point of evolutionary development which other embryonic forms will inevitably replicate. In continental Europe, however, an entirely different animal lurks beneath the DC skin. One that, on the evidence of InterSec's survey, may not grow to look like its cousin across the pond.

DC plans in the US typically offer participants a wide choice of mutual fund investment options as part of a bundled service which includes accessible regular investment information, unitised accounting and educational support. In continental Europe, and even in the UK, there is scant evidence of current demand for the US model.

At its simplest, DC means shifting the risk from the organisation sponsoring the pension plan to the individual participant. A primitive DC plan would be one that paid contributions into the participant's account and at retirement handed the accumulated payments and interest to the retiree.

In Europe's two largest DC market places, Switzerland and Denmark, this is the case. Sponsors are obliged by law to provide a minimum annual return (currently around 4%). This is a significant disincentive to allowing participant choice in investment decisions and encourages the sponsor to opt for low-risk assets. Typically in these and other European countries DC plan sponsors allocate an annual investment return to their participants (which may not be much above a cash interest rate), sometimes holding a reserve for poor years. This is an insurance - rather than investment - environment, employing as it does with-profits" methodology. From a service provision point of view, the demand from DC plan sponsors is for an investment and administrative structure which differs very little from that offered to the DB world. Accounting and administration are very simple, reporting is frequently an annual event, there is little or no use of mutual funds and segregated account appointments of investment managers are normally the case.

Across continental Europe there are cultural, political and professional barriers that preclude participant involvement. There is an instinctive distrust of the Anglo-Saxon way of doing things and a nationalistic reaction against models "not invented here". This is coupled with paternalistic attitudes by governments, unions and many employers. The orthodoxy is that professionals, whether they be the plan's investment officers or its consultants, are in the best position to decide what is in the people's interests. These attitudes conceal a central paradox: the idea that individuals are mature enough to carry risk, but not to manage it.

Moreover, the research found very little evidence of a grass-roots rebellion. DC participants in continental Europe are not demanding involvement in the investment process. This raises the important question of if and when they will. The survey found clear evidence of nascent participant choice - limited, however, to a few countries and sectors. In Germany it may develop in the personal pensions sector as the government considers the introduction of investment funds dedicated to retirement savings. German occupational plans have traditionally been final salary; nevertheless, there is a trend towards switching to DC, with some book reserve plans being designed to mimic DC structures.

Significantly, the subject of pension funding is now firmly on the agenda for discussion in Germany, although the major constraint to the growth of assets there remains the absence of a tax-efficient and dedicated funding vehicle for occupational pension provision.

Across continental Europe, fiscal incentives are likely to take second place to meeting the criteria for economic and monetary union, and with unemployment high there is less incentive for employers voluntarily to offer supplementary retirement benefits.

The recent pensions legislation in France has been stalled, although not necessarily blocked, by the new government. If it does go ahead the schemes may be DC. In Spain (where mandatory funded schemes are being phased in) the requirement to fund means that many plan sponsors are switching to DC.

In France, Italy and Spain a crucial issue is the involvement of trade unions in the structuring of funds; their bias tends to be towards centralised control and away from participant involvement.

We found an instinctive distrust for excessive individualism in the heartland of social democracy; in the Netherlands, for example, plan sponsors, participants and their trade unions oppose DC. Dutch DB pension plans, however, unlike those in most of continental Europe, are well funded.

Elsewhere governments, whatever their political persuasion, have little choice but to take the DC route, which runs counter to old ideas of social partnership. The compromise is to rein in excessive individualism, "protect" savers from themselves and impose rigorous professional and legislative guidance.

It would be wrong, however, to assume that DC with participant choice does not exist in continental Europe; a number of multinationals and employers in the finance and information technology industries offer such plans.

It may be that demand for choice will grow as the present generation of decision-makers matures and is replaced by a younger, more consumer-aware group. Already in Denmark, we are seeing calls for greater democracy in the running of pension plans.

The culture of collectivism may change, but at the moment there is simply no room for laissez-faire capitalism when it comes to investing for future retirement.

The irony is that as the weight of demography breaks down the solidarity between generations, many European pensioners are likely to find themselves very much on their own. Their no-choice DC plan with its low-risk, low-return profile could turn out to be a future political liability."

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