Whilst private-funded pension systems could play a key role in supporting productive investment, they remain underdeveloped in most European Union (EU) countries, according to the Organisation for Economic Co-operation and Development (OECD).

In its latest EU and Euro Area Economic Survey, the OECD found that capital markets remain underdeveloped, reflecting a lack of deeper pools of long-term capital provided by retail and institutional investors such as pension funds, hampering effective financial intermediation.

This is despite a high savings rate amongst European households, with savings mostly kept in bank deposits with low returns.

Given this, the OECD suggested that the failure of high savings to flow into productive investment may be due to insufficient risk-taking by a largely bank-based financial system.

It therefore argued that shifting savings from bank deposits to long-term investment, including retail investment and pension assets, would help channel more capital to innovative firms and secure better returns.

In particular, it argued that the pensions system, and particularly private-funded pensions systems, could help contribute to providing sufficient long-term capital to support productive investment.

The OECD acknowledged that some work is already underway in this area, as the European Commission (EC) recently shared its Savings and Investments Union (SIU) Strategy, which included measures to mobilise private savings for long-term investment and ease access to equity finance, including a blueprint savings and investments account and actions to strengthen the uptake of private and occupational pensions.

These efforts, according to the OECD, are expected to complement ongoing work to harmonise insolvency frameworks, as well as work to align tax frameworks for cross-border investment.

In addition to efforts at the EU level, however, the OECD suggested that multi-country initiatives could enhance market integration in areas where EU legislation has limited reach, such as taxation, which remains largely under national jurisdiction.

"EU countries can coordinate their actions to help advance the creation of a Savings and Investments Union, complementing EU-level initiatives," the group stated.

"While in most EU countries, private pensions and owner-occupied residential property benefit from lower marginal effective tax rates, taxation on other forms of savings follows different approaches.

"Many EU countries still favour bank deposits with generous tax advantages compared to corporate bonds, shares or investment funds."

However, the OECD found that private funded pension systems remain underdeveloped in most EU countries, with the notable exception of some northern European countries. Denmark, the Netherlands, and Sweden, for instance, have introduced such private funded pension systems.

Indeed, the OECD's survey showed that only Denmark, the Netherlands and Sweden – countries with large private-funded pension systems, have a higher share of household assets hold in equity and investment funds.

"To broaden the retail investment base, the EU could collect best practices and advocate for reforms via the Eurogroup and the European Semester," it stated.

"Such an exercise could draw on the successful experiences in countries that offer tax incentives for retail investment, including tax deductions for private pension savings, such as in Denmark and Sweden."

In addition to this, the OECD said that pension reforms that support a stronger uptake of privately funded pensions would also help expand the retail and institutional investor base.

It said that auto-enrolment could be one potential route for this, noting that, as part of its SIU strategy, the EC previously announced plans to encourage EU countries to promote auto-enrolment in occupational pension schemes, and enhance the EU framework for occupational and personal pensions.

Broader tax issues were also highlighted, however, as the OECD warned that preferential tax treatment of national bank savings products still poses a "formidable challenge" to the development of EU-wide savings and investment products.

For instance, in 2022 the EU introduced the Pan-European Pension Product (PEPP) to pool private pension savings across EU countries.

However, the OECD pointed out that there has been "disappointing" uptake due to tax disadvantages compared to national bank saving products such as life insurance and private pension products, among other barriers.

"The differential tax treatment of long-term retail investment hinders cross-border portability," it stated. "One way forward would be for a group of countries to test harmonised taxation rules for long-term investment products.

"For instance, Spain and six other EU countries (Estonia, France, Germany, Luxembourg, the Netherlands, and Portugal) have launched the European Competitiveness Laboratory in March 2025 to work on harmonisation of aspects related to long-term savings products, among other things.

"The initiative is open to all other EU Members. Cost-benefit analysis of investment tax frameworks by the European Commission would be useful and relatively inexpensive."

The OECD's survey suggested that other changes are also needed to address broader cross-border concerns, noting that another barrier to within-EU labour mobility is difficulties in transferring pension rights across borders.

To address this, the OECD suggested that faster exchange of information on pension rights is needed through the Electronic Exchange of Social Security Information system.

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