European pension adequacy is “increasingly under pressure”, as public pension replacement rates are projected to decline across most countries between 2026 and 2070, according to a report from the European Fund and Asset Management Association (EFAMA).

Its report, Household Participation in Capital Markets: From savers to investors - current challenges, recent progress, and factors affecting the result, said the projected deterioration in replacement rates will happen despite public pension expenditure remaining broadly stable at EU level, or even increasing in some countries.

“This suggests that demographic pressures are outweighing the capacity of public pension systems to maintain levels of income replacement. This is particularly evident in countries where replacement rates are expected to worsen even whilst public expenditure is set to increase,” the report stated.

It warned that, while pension systems differ across member states, the overall picture is that EU countries are unlikely to provide retirement income to the same degree through first pillar pensions in the future.

As a result, it said workplace (second pillar) and private (third pillar) pensions will become “increasingly necessary” to ensure citizens have sufficient income in retirement.

Furthermore, EFAMA argued that several measures should be used in conjunction to improve household participation in capital markets, including pension design, savings and investment accounts, tax-based incentives, financial literacy and reducing complexity.

It noted that developing the supplementary pension sector is a key component of the European Commission's Savings and Investments Union (SIU).

The report also highlighted low participation in supplementary pensions, noting that only 20 per cent of Europeans participate in an occupational pension scheme and just 18 per cent own a personal pension product.

It said these low participation levels increase the risk of future retirement income inadequacy.

However, EFAMA pointed to auto-enrolment into workplace pension schemes, with the option to opt out, as an effective way to overcome behavioural barriers such as inertia, procrastination and limited financial knowledge.

It said that only five European countries currently have auto-enrolment in place, suggesting there is scope for wider adoption across Europe.

---