The European Fund and Asset Management Association (Efama) on 22 January 2024 published a on household participation in capital markets, which was followed by a webinar on 6 February that explored the results of the study.

“In this report, we have looked at the financial assets owned by households,” explained Bernard Delbecque, senior director for economics and research at Efama, one of the speakers during the webinar. “We have calculated how much money is held in cash and deposits, and how much is invested in capital markets instruments.”

The calculation takes into account deposits, pension funds, life insurance products, investment funds, listed shares and debt securities, but excludes “unlisted shares”--what people own as owners of a company and real estate, for instance--in order to focus on the progress made in investing more in capital markets.

To do so, Efama looked at three main indicators: “First, the amount of money held in bank deposits. Secondly, the ratio between what is invested in the markets and what is held in deposits. And thirdly, the ratio between the new investment in capital markets and the increase in deposits.”

Deposits: from 37% to 41%

“Many households are still putting all their savings into bank deposits,” noted Delbecque, which means that “the level of retail participation is very low in many European countries.” It’s been “well-documented” that by putting some savings into the capital markets instead of in bank deposits, “you can get a decent, real return” that can help increase personal financial wealth, he argued.

As people age, many “risk falling into poverty because they will lack the adequate income that is needed for them to live in retirement. So you need to complement your savings or what you expect from a public pension” by investing in the markets, said Delbecque, citing one need for more retail investment.

But more investment is also needed to finance the green and digital transitions. “If people would invest more in the markets, there would be more choice in terms of funding for businesses, and in particular, for SMEs and for startups.”

That being said, an increase in retail participation has not really been seen over the last 10 years, and “this is disappointing.” “The amount of savings that is held in cash and bank deposits--let’s not forget the cash, but it’s a small percentage--has increased from around €10trn in 2015, when the CMU [capital markets union] project was launched, to €14trn in 2022.” That means cash and deposits went from 37% of households’ financial wealth in 2015 to 41%. “So we didn’t really go in the right direction over the last 10 years.”

What is “striking,” noted Delbecque, is that the amount of money that is placed into deposits each year. In 2020, “more than a trillion of new money was put into deposits, because of covid. This is just an impressive amount of money. So from that perspective, I would say there is not much to rejoice about.”

That being said, in both 2021 and 2022, more than €500bn was invested in capital markets--quite a bit more than was invested in the markets in previous year. “This was an encouraging development.”

Luxembourg in 5th place

And certain countries have made progress. Slovakia, Germany and Norway were the top three countries in terms of capital markets instruments ratios cited by Delbecque during the webinar; Efama’s report shows that Luxembourg is ranked fifth.

16% of household assets in investment funds in Luxembourg

When it comes to how households allocate their savings, “there are huge differences,” both across Europe and within countries, said Delbecque. “In northern Europe--in particular, in Scandinavia, Denmark, the Netherlands, the UK--the share of deposits is quite low compared to the European average. The European average is 41%. And in Denmark, only 20% of the financial wealth is held in bank deposits.”

Luxembourg households had 58% of their financial assets in deposits as of the end of 2022, said the Efama report. This is 17 percentage points higher than the European average. However, 16% of household financial assets were in investment funds--the fifth highest among the European countries included in the study.

In the Scandinavian countries, the UK and the Netherlands, a significant share of household financial wealth is in pension plans and life insurance products, added Delbecque.

In southern and eastern Europe--with the exception of Hungary and Italy--the share of deposits is much higher than the European average, he said. In Greece, for instance, 83% of the financial wealth is held in bank deposits.

Pensions and capital market participation

“Pension savings is a key driver to greater participation in capital markets,” said Delbecque. “We find a good correlation between the public pension and the participation in the capital markets.”

In countries like Spain, Portugal and Greece--where the replacement rate of public pensions today is quite high (in Spain and Greece, the gross pension replacement rates are around 80%, meaning a person gets 80% of their pre-retirement earnings, according to OECD data)--the population trusts that they have access to a good pension once they retire, he argued. And because of this trust in the state, “they may favour consumption or deposits rather than taking the risk of going into the capital markets, because they don’t feel the need to save as much for retirement.”

On the other hand, in countries like Sweden or Denmark--where people invest a lot in the capital markets--the replacement rate of the public pension is lower, said Delbecque. OECD data says that a person in Sweden gets around 62% of their pre-retirement earnings.

Only 4% of Luxembourg households’ assets were in pension funds (far lower than the European average of 24% and the figures in the Scandinavian countries, the Netherlands and the UK), according to Efama’s report.

How to better prepare for retirement

One of Efama’s reasons for why people should invest in the capital markets is to help them build up their personal wealth and have more money when they retire. So concretely, what are some ways of doing this?

“The key recommendation is to encourage member states to develop funded pensions to complement the first pillar of pension,” said Delbecque. “It is not by chance that Sweden--which I mentioned already a few times--is well ranked in this report. It is because the authorities long ago took measures to encourage retirement savings, and one of these measures is the obligation for people to invest 2.5% of their salary in investment funds to complement their public pension.”

“This is the mandatory approach to pension savings that was adopted in Sweden around 1999. After 25 years, many Swedish households have built a nice ‘pot’ to complement the pension.”

But not all governments are keen to take this approach, said Delbecque. Efama and the European Insurance and Occupational Pensions Authority recommend the automatic enrolment of employees into occupational pension schemes. “If you automatically enrol, you avoid the inertia that characterises the behaviour of many people.”

Efforts should also be made to increase awareness around the income that people can expect to receive when they retire, he added. Pension tracking systems are tools that can help people know how much money they’ll get.

And at the European level, the pan-European pension product should be reviewed, Delbecque concluded.

Find Efama’s full report on household participation in capital markets .