Quantitative restrictions on pension investments in the European Union “may currently be too restrictive” to allow pension funds to support the green transition, according to the OECD.

Publishing its latest Economic Survey of the European Union and economic area, the OECD noted that many EU countries have quantitative restrictions on pension funds in place that limit investment in private equity and venture capital.

“Existing restrictions reduce funding options for start-ups. Limited financing contributes to slowing the development and commercialisation of new technologies. A particular concern is low funding for the scale-up of innovative start-ups. Prudent regulations are important to protect pensioners’ contributions,” the report noted.

The OECD believes that easing quantitative restrictions on pensions funds could unleash investment in green technologies. However, it acknowledged that there are risks associated with relaxing the rules and, therefore, safeguards and appropriate investment regulations will need to be in place.

“In the longer term, bolstering capital markets could be achieved through a stronger take-up of capital-funded pensions. This could entail auto-enrolment in occupational pension schemes, although this is under the responsibility of EU countries,” the OECD stated.

The report found that European economic recovery has been disrupted by Russia’s war against Ukraine, which has driven energy and food prices higher and curbed the post-pandemic rebound.

The Survey projects growth will pick up gradually, from 0.9 per cent in 2023 to 1.5 per cent in 2024, with inflation expected to decrease to 5.8 per cent in 2023 and 3.2 per cent in 2024, but to remain above the European Central Bank’s 2 per cent target.

The survey said that a stronger and deeper Single Market can help Europe boost growth and innovation while fostering structural change. Priorities should include renewed efforts to ensure a level playing field, through a consistent and evenly applied state aid framework, as well as a re-direction of EU resources towards support for green R&D, innovation and early-stage support.

Achieving climate change objectives – notably the net-zero target by 2050 – will require an acceleration of emission reductions, according to the OECD. More action is needed across all sectors, but particularly in sectors not covered by emission trading, notably agriculture, buildings and transport.

“An important element of the green transition is affordable and secure energy, which requires more integrated electricity markets. Deeper capital markets could support the development of new clean technologies, while improving labour mobility and skills will help to reduce transition costs,” the report said.

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