Europe’s Investment Drive Puts $4.9 Trillion of Pension Fund Assets in the Spotlight
European pension funds are entering a period of radical change. On both sides of the English Channel, policymakers are working to unlock pension savings as a source of vital investment to catalyse economic growth. With this goal in mind, they are considering incentives and rule changes to encourage long-term, higher-risk investment. They are also pushing to accelerate consolidation in pension markets to create larger capital pools.
Policymakers have long sought to harness pension savings to fuel growth.1 The prize is substantial: UK and continental defined-benefit (DB) and defined-contribution (DC) occupational pension funds have the equivalent of about $4.9 trillion of assets under management, according to the most recent available data.2
Recently, efforts to mobilize this capital have intensified. In the UK, the government plans to revamp pension rules to encourage productive investment in the country’s economy.3 In the European Union, plans include a new Savings and Investment Union aimed at helping develop capital markets and spurring investment to finance growth and innovation in the bloc.4
Much of the policy agenda reflects trends that are already in progress. Pension funds are already significant investors in their local economies. In the UK, for example, pension funds held £541 billion of UK productive assets – listed equities, corporate bonds and alternatives – as of late 2023.5 UK and EU policymakers are seeking a significant increase in such investments. Similarly, consolidation has been under way for years.6 By accelerating this process, policymakers aim to create more efficient funds with the scale and capacity to increase investment in riskier assets such as infrastructure and early-stage companies.7
For pension funds, these policy initiatives create opportunities as well as challenges. Allocations to asset classes such as venture capital, private equity and infrastructure could help pension fund managers diversify their portfolios and potentially earn attractive returns, in our view. Yet expanding investment into these areas could require specialist market expertise and give rise to additional governance issues. For these reasons, we think the current push toward larger pension funds and riskier investments could increase the importance of ensuring the right skill sets are available to help pension funds achieve their goals.
UK’s “Big Bang of Reforms”
In promoting its overhaul of UK pension fund rules, the government has emphasized the vast pools of capital it seeks to tap. Creating local-government pension megafunds could deliver £80 billion of investment, according to the government.8 Occupational DC schemes are set to manage £800 billion in assets by the end of the decade, and surplus funding in DB schemes amounts to £160 billion.9
To make more of this capital available for productive investment, the government has proposed a “big bang of reforms” that would significantly alter the pensions landscape in the UK.10 At the heart of this effort is a planned Pension Schemes Bill that will include a value-for-money framework designed to focus DC schemes on delivering value over the long term. The bill will also promote further consolidation in the DC market. The government sees £50 billion in assets under management as the key threshold beyond which schemes have the scale needed for asset diversification and greater direct investment.11
The government is also promoting consolidation in the DB market, which comprised more than 5,000 schemes at the end of 2024.12 In addition, ministers have announced plans to make it easier for schemes to extract surplus funding. At present, schemes are generally only allowed to distribute excess funding to the sponsor when it exceeds the level needed for a full buy-out with an insurer. With about three-quarters of schemes in surplus (albeit not on a full buy-out basis), the government has indicated it will propose lifting restrictions on how those surpluses can be accessed.13 The Pensions Regulator has endorsed safely releasing surplus to improve member benefits or boost investment in the UK economy.14
The potential investment that would result from easing surplus extraction probably falls short of the £160 billion mentioned by the government, in our view. Some of the surplus will likely be shared with scheme members, for example. Schemes aiming for a buy-out agreement with an insurer may also be reluctant to consider riskier investments. We think the matching component of DB schemes’ portfolios will continue to be dominated by fixed income. The surplus, by contrast, offers greater investment flexibility that some schemes could use in pursuit of improved returns.
EU’s Push to Activate Savings
In the EU, policymakers’ efforts to boost pension-fund investment in the real economy are part of a larger effort to deepen the bloc’s capital markets and promote greater economic and social cohesion in the bloc. There has been a flurry of regulatory proposals and other initiatives in the decade since the EU set out to build a single market for capital, yet companies still rely primarily on bank financing rather than tradeable equity and debt.15 Pension funds have long been seen as a key source of capital to help shift this balance.
As part of a proposed Savings and Investment Union, the European Commission has made the case for expanding occupational and personal pensions and increasing their role in economic development. To achieve this, the commission plans to address unnecessary regulatory barriers for pension funds to boost investment in equity and alternative asset classes such as venture and growth capital. It also plans to clarify how such investments can align with the “prudent person” rule in EU law,16 whose requirements include that assets should be predominantly invested on regulated markets, and investment outside regulated markets kept to prudent levels.17
Another change that may lead to increased productive investment by pension funds, in our view, is the ongoing shift from DB to DC schemes. This trend is particularly evident in the Netherlands, by far the largest occupational pension market in the European Economic Area.18 The Dutch pension industry has undergone steady consolidation over the past 25 years, with the number of supervised funds declining from about 1,000 at the turn of the century to 162 last year.19 Meanwhile, assets under management in Dutch pension funds have soared to €1.6 billion.20 Now all active funds, which are predominantly DB,21 must transition to DC by the end of 2027 under a reform of the pension industry. In many cases this will involve a degree of risk-sharing among members.22
We think the shift from the DB to DC pension model could have investment implications including reduced demand for lower-risk assets such as government and investment-grade debt, and increased demand for higher-risk assets that potentially offer higher returns. For example, the European Central Bank has noted that the transition from DB to DC could reduce demand for long-duration bonds and swaps, while boosting investment in equities.23 A challenge for policymakers will be steering those investments into the European economy rather than markets overseas. In the Netherlands, for example, pension funds had €293 billion invested in US non-financial corporations at the end of 2024, compared with just €97 billion in EU counterparts.24
Opportunity for OCIO Providers
Europe’s pension funds are operating in an increasingly demanding environment. In addition to government efforts to spur further consolidation of funds and encourage more productive investment, pension fund managers must contend with a rapidly evolving regulatory framework and uncertain investment markets. Yet the resources available to many managers, especially at smaller funds, have not grown in step with the challenges they face.
Outsourcing services such as OCIO (outsourced chief investment officer) and fiduciary management may offer pension-fund managers and sponsors options as they consider their next moves. Under these arrangements, pension-fund managers or trustees retain ultimate control over policy decisions while delegating activities such as the setting and implementation of investment strategy to a specialist firm, usually an asset manager.
A pension fund seeking the benefits of consolidation could pursue a formal merger, which can be a complex and cumbersome process. Or they could choose what we feel is a lighter-touch approach via OCIO or fiduciary management. Typical goals of pension-fund consolidation include achieving scale, safeguarding and enhancing member benefits, and improving efficiency. We think an experienced asset manager with global reach and deep market knowledge across asset classes could help funds achieve these goals.
Scale can be gained through the external manager’s pooling of assets from multiple clients. The security of members’ benefit could potentially be enhanced through portfolio diversification in pursuit of stronger risk management. An asset-management specialist could also help pension funds manage the risks and take advantage of the potential opportunities that may arise as European governments push for increased productive investment.
1 For example, vehicles such as the UK’s Long-Term Asset Fund (LTAF) and the European Union’s European Long-Term Investment Fund (ELTIF) were introduced to increase the amount of non-bank financing available to companies that need long-term capital. On LTAFs, see “FCA Authorises First Long-Term Asset Fund,” Financial Conduct Authority. As of March 24, 2023. On ELTIFs, see “European Long-term Investment Funds - Frequently Asked Questions,” European Commission website. As of February 13, 2015.
2 The dollar figure provided here is derived from the following reports:
- “Occupational Defined-Benefit Landscape in the UK 2024,” The Pensions Regulator. As of December 11, 2024. Asset data as of March 31, 2024.
- “Occupational Defined-Contribution Landscape in the UK 2024,” The Pensions Regulator. As of March 4, 2025. Asset data as of December 31, 2024.
- “EIOPA IORPS in Focus Report 2024,” European Insurance and Occupational Pensions Authority. As of February 11, 2025. Asset data as of end-2023.
The original UK figure is £1.495 trillion, of which £1.2 trillion were held by defined-benefit schemes and £267 billion by defined-contribution schemes, including hybrids. The original figure for the European Economic Area as of end-2023 is €2.72 trillion. These figures have been converted to US dollars for the sake of comparability. UK DB assets in pounds sterling were converted using the exchange rate as of March 31, 2024. UK DC assets in pounds sterling were converted using the exchange rate as of December 31, 2024. EEA figures in euros were converted using the exchange rate as of December 31, 2023.
3 “Pension Reforms to Go Further to Unlock Billions to Drive Growth and Boost Working Peoples’ Pension Pots,” Prime Minister’s Office. As of January 28, 2025.
4 “Savings and Investments Union: A Strategy to Foster Citizens’ Wealth and Economic Competitiveness in the EU,” Communication from the European Commission. As of March 19, 2025.
5 “Pension Scheme Assets – How They Are Invested and Why They Change Over Time,” Pensions Policy Institute. As of September 2024. Pension funds include private- and public-sector DB schemes, DC schemes and annuities.
6 In the EEA, for example, the number of occupational pension funds (known as “institutions for occupational retirement provision,” or IORPs) fell to 1,419 at the end of 2023, down by 5% from three years before. See “EIOPA IORPS in Focus Report 2024,” European Insurance and Occupational Pensions Authority. As of February 11, 2025.
7 In the UK, for example, the government seeks to pool the assets of 86 local government pension schemes to build “megafunds” like those in Australia and Canada. See “Pension Megafunds Could Unlock £80 billion of Investment as Chancellor Takes Radical Action to Drive Economic Growth,” HM Treasury. As of November 13, 2024.
8 “Pension Megafunds Could Unlock £80 Billion of Investment as Chancellor Takes Radical Action to Drive Economic Growth,” HM Treasury. As of November 13, 2024.
9 “Pension Reforms to Go Further to Unlock Billions to Drive Growth and Boost Working Peoples’ Pension Pots,” Prime Minister’s Office. As of January 28, 2025.
10 “Chancellor Vows `Big Bang on Growth’ to Boost Investment and Savings,” HM Treasury. As of July 20, 2024.
11 “Pensions Investment Review: Unlocking the UK Pensions Market for Growth,” Department for Work & Pensions and HM Treasury (closed consultation). As of November 14. 2024.
12 “Occupational Defined-Benefit Landscape in the UK 2024,” The Pensions Regulator. As of December 11, 2024.
13 “Pension Reforms to Go Further to Unlock Billions to Drive Growth and Boost Working Peoples’ Pension Pots,” Prime Minister’s Office. As of January 28, 2025.
14 “Statement from The Pensions Regulator on Government Plans for DB Surpluses,” The Pensions Regulator. As of January 28, 2025.
15 Less than 30% of European firms’ funding comes from capital markets, compared with nearly 70% in the US. See “IMF Background Note on CMU for Eurogroup,” International Monetary Fund. As of June 15, 2023.
16 “Savings and Investments Union: A Strategy to Foster Citizens’ Wealth and Economic Competitiveness in the EU,” Communication from the European Commission. As of March 19, 2025.
17 The “prudent person” rule is set out in Article 19 of the EU’s pensions directive. See “Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs),” EUR-Lex website. As of December 14, 2016.
18 The Netherlands accounted for as much as 59% of total pension-fund assets under management in the European Economic Area (EEA) at the end of 2023. See “EIOPA IORPS in Focus Report 2024,” European Insurance and Occupational Pensions Authority. As of February 11, 2025. The EEA consists of the EU’s member states plus three members of the European Free Trade Association: Iceland, Liechtenstein and Norway.
19 De Nederlandsche Bank database. As of end-2024.
20 “EIOPA IORPS in Focus Report 2024,” European Insurance and Occupational Pensions Authority. As of February 11, 2025.
21 Ibid.
22 “Pensions,” De Nederlandsche Bank website. As of April 2, 2025.
23 “The Structural Impact of the Shift From Defined Benefits to Defined Contributions,” published as part of the ECB Economic Bulletin, Issue 5/2021. European Central Bank. As of 2021.
24 “Dutch Pension Funds Invest More in US Companies Than in European Companies,” De Nederlandsche Bank. As of March 11, 2025.
