Europe’s growing productivity gap to the US and China in particular could be closed with the help of more long-term risk capital in asset classes such as public and private equities and infrastructure to drive productive investments, according to a study authored by researchers at McGill University in collaboration with the Association of the Luxembourg Fund Industry (ALFI).

In a report titled “EUROPE’S PRODUCTIVE CAPITAL GAP – Mobilising pension and household savings to scale up risk capital”, authors based at McGill looked at how countries such as Canada, Sweden and Australia have benefited from reforms that boosted savings in areas such as workplace pensions, and how relevant capital flows have supported increased productivity through investments.

Outlining the findings, Patrick Augustin, Canada Research chair and associate professor of Finance at McGill University’s Desautels Faculty of Management, and academic director, Master of Management in Finance (MMF) Luxembourgh, and director of the McGill Luxembourg Centre for Finance, noted that as much of Europe’s pension systems are still heavily reliant on pay-as-you-go models, there is limited scope for ‘spill-over’ effects, such as investing more in assets deemed riskier, but that are critical to supporting access to capital to drive productivity.

As a result of studying those countries’ systems where key reforms encouraged savings into additional pillars beyond the state pension, the research has honed in on a number of key takeaways, including:

  • The divide in accumulated risk capital between capitalised and predominantly PAYG retirement systems is striking. Today, workers in capitalised system have about €209,234 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 €6.5trn rather than €2.8trn. For Germany, it could be € trn instead of €2.8trn.
  • 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 incremental approach enabled governments to build political consensus, reduce transition costs associated with the reforms, and harness the power of compound returns over multiple decades.
  • Capital accumulation and risk-taking reinforce each other, creating a powerful amplification mechanism. Countries with higher savings per active worker also 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 to €161,000 in Germany – and invest a much larger share in risk capital: 75% versus 41%. Over time, the combination of higher contributions and riskier allocations has compounded, driving far stronger risk capital formation in capitalised regimes.
  • Exposure to risky assets through public and occupational pensions encourages greater risk-taking in voluntary household savings, adding another layer of amplification. We document 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 United States further shows that enrolment in defined-contribution occupational pension plans increases household stock market participation and risk-taking, thereby enhancing retirement wealth accumulation.
  • There are multiple pathways to risk capital accumulation. Reformed countries have pursued different strategies across the pillars of the pension ecosystem. Canada 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. “Salary sacrifice” schemes further promote voluntary pension contributions through the occupational system. 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 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. Scale lower costs and broadens access to asset classes such as private infrastructure, resulting in more cost-efficient investment options. Strong governance and clear fiduciary mandates support risk tolerance, long-term horizon investment horizons, and professional asset management. Broad coverage ensures widespread participation. Portability helps to achieve scale and reduces the risk of sudden withdrawals. Fiscal incentives further boost voluntary participation.

In respect of lessons learned, the study put forward different pathways for Europe to consider on building pension savings that in turn could unleash greater investment potential.

“The first is the creation of a pan-European “super-default” fund, modeled on Sweden’s AP7 or the UK’s NEST, in which employers could voluntarily participate. The second is the establishment of opt-in employer gateway platforms that pool contributions across regions and firms to increase bargaining power and expand investment choice. Both pathways give all European workers access to cost-efficient, equity-heavy default options. Risk capital can be further scaled by opening employer-based investment platforms to voluntary contributions, like Australia’s “salary sacrifice” scheme. This would provide households with institutional access to diversified, long-horizon portfolios that are otherwise beyond the reach of small savers,” the report authors conclude.