Looking across Europe is a thankless task in the pensions world, because the black and white pensions categorisation that works in the US and UK – defined contribution, defined benefit or final salary – does not work at all well in continental Europe.
There is a huge variety of pension systems with many different structures, participants and levels of guarantee.
A large proportion of European pensions falls somewhere in the grey spectrum between pure DC and DB.
So at Spence Johnson we have developed a categorisation system to allow us to put the funded pension elements we are observing into four distinct segments:
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Pure DB - Similar to DB pensions in the US/UK
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Semi DB - Not pure DB, but shows DB characteristics
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Semi DC - Not pure DC but shows DC characteristics
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Pure DC - Similar to DC pensions in the US/UK
We have measured European pensions by selecting the eight countries that hold most funded pensions.
Within each country, both funded and workplace pension elements have been selected, avoiding retail and insured elements.
Nearly 80 per cent of third-party assets, managed pension and insurance general account assets in Europe are to be found in three countries: the UK, Netherlands and Germany. And of these, 50 per cent is in the UK alone
This means we include the UK but exclude France, Belgium and Spain.
Following this technique, European pensions total €4.8tn. The pure and semi DB assets we have looked at total €3.8tn, and the pure and semi DC-style assets another €1tn.
Pure DB represents the largest part of the European pensions market, with €2.2tn, and semi DB a further €1.7tn. Pure DC accounts for €0.8tn and semi DC holds another €0.2tn.
We have shown in the bottom chart how these assets are proportionately spread by country.
The composition of these assets, in terms of DB versus DC-style structures, varies significantly. Markets like Denmark are exclusively DC-style. Others such as the UK have a strong heritage in DB and big asset pools, but also have a substantial and fast-growing pure DC offering.
The largest pensions market in Europe
One of the conclusions from this work is that it emphasises the importance of the UK within European pensions.
The UK is the largest workplace pension market in Europe. The UK (€1.9tn) is nearly twice the size in terms of assets of the next largest country, the Netherlands (€985bn). The Netherlands and the UK have more funded pensions than the other six countries combined.
A heritage of strong state retirement support has limited the development of substantial workplace savings in markets like Italy and Norway.
If you just consider pensions and other institutional assets managed by third-party asset managers, the UK is even more important in relative terms.
Nearly 80 per cent of third-party assets, managed pension and insurance general account assets in Europe are to be found in three countries: the UK, Netherlands and Germany. And of these, 50 per cent is in the UK alone.
This is largely the result of the UK’s significant DB funded pensions market, which on its own makes up 42 per cent of the European total of third party managed funded insurance and pension assets.
Magnus Spence is managing director of Spence Johnson
