“Raise your hand if more than 100% of your retirement portfolio is invested into stocks, in particular, if you operate with leverage, I don’t see many hands,” asked and observed Patrick Augustin, associate professor, finance, McGill University, during the Alfi Private Assets Conference on 1 October 2025.

Aggressive risk capital allocation?

The case of Sweden serves as a central example by Augustin, as it has a highly developed public pension system which includes a “premium pension” pillar in addition to the standard or income pension system (a defined contribution system taking 2.5% of earnings). Within this former system, he explained that the default fund offers an age-based glide path allowing up to 125% equity exposure until age 55, meaning the system operates with leverage. Only after age 55 does the exposure gradually decrease, reaching 100% fixed income by age 75.

Consequently, the average individual in Sweden has approximately 75% exposure to risk capital (defined as public/private equities, real estate, and infrastructure) in their portfolio, “one of the highest levels globally.”

Investment Approach Matters

This difference in investment approach underlies the productive capital gap.

Augustin commented that nine studied economies were segmented into “capitalised economies” (Denmark, Finland, Netherlands, Sweden, Australia, and Canada) and “pay-as-you-go” (PAYG) economies (France and Germany).

Capitalised economies which underwent successful pension reforms show vastly greater risk capital accumulation. For instance, Sweden has accumulated close to €250,000 in risk capital per active worker. The average accumulation across capitalised economies is €209,000, compared to only €60,000 to €90,000 in PAYG economies like “France and Germany—also in Luxembourg.” The difference is the so-called “productive capital gap.”

Missing wealth

Augustin thinks that France and Germany could have reached the same accumulation levels as capitalised economies if they had adopted similar reforms 20 to 30 years ago. When scaled to the entire working population, he calculated that the missing productive capital gap is potentially reaching €9trn in Germany and €6.5trn in France against €2.8trn currently for both economies.  

The McGill University professor argued that this lack of available risk capital prevents investment into crucial areas such as R&D, innovation, and infrastructure (digital and green) and consequently harms productivity, growth, and competitiveness.

Where is the productive capital gap coming from?

Simple, intuitive mechanisms drive this gap, according to Augustin. Firstly, countries that have higher total savings also tend to have a higher portion invested into risky assets (higher risky share). The compounding effects of higher savings combined with higher risk allocations lead to the widening productive capital gap over time.

Secondly, Augustin suggested a behavioural link: individuals exposed to risk capital through public and occupational pension systems (pillars 1 and 2) are also more likely to take risks in their individual household savings. He observed that countries like Sweden and Denmark show strong evidence of this positive relationship, though the relationship can quickly “flip,” as highlighted by the example of Australia.

A model from down under

“Australia is an example highlighting why the design of your pension architecture is crucially important to foster financial literacy,” stated Augustin. Australia’s occupational system (superannuation) leverages mechanisms like “salary sacrifice” with highly favourable tax rates. Consequently, he noted that “a lot of savings by individuals” go through these mechanisms “where they give up parts of the salary and then save through the occupational pension architecture.”

Key lessons from successful pension reforms.

Augustin completed his presentation outlining the features of the pension system of Canada, Australia, and Sweden that went through “very different paths of reform”:

1. Canada: “Probably one of the most sophisticated public pension system architectures in the world,” the country focused on reforming the public reserve fund (Canada Pension Plan) and prioritised governance and scale. The Canada Pension Plan Investment Board operates at arm’s length from political influence, enabling professionalism and significant in-house investing (over 50% of assets). “It compares to probably about 20% for other pension funds in the world.” Scale, driven by asset pooling across provinces, supports investments into private assets. Canada shifted its allocation from 100% fixed income in 1999 to 75% risk allocation in 2024, whereas the assets under management have grown from CA$34 in 1999 to more than CA$600bn in 2024.

2. Australia: Reformed the occupational pension system (superannuation), making it mandatory and providing near-universal coverage (90% of the workforce). This defined contribution system drives scale through consolidation and efficient asset pooling, resulting in 75% risk exposure through the occupational plan (pillar 2) that amounts to AU$2.3trn in AuM.

3. Sweden: Reformed all three pillars (public, occupational, private). The public premium pension allows 125% equity exposure. Furthermore, 65% of Swedes participate in capital markets by investing in public equity or mutual funds, one of the highest figures globally, bolstered by financial literacy programmes and tax incentives.

Key takeaways

Augustin remarked that despite these different routes, common factors consistently drove successful reform outcomes: gradual reforms, broad coverage, scale, professional asset management, strong governance, cost efficiency, portability, and fiscal incentives.

He thinks that the successful reform countries demonstrate that mobilising risk capital through structural pension changes is feasible, offering models relevant to Europe despite its political and geographical fragmentation, and is fundamental to Europe’s future growth model.