Feed the Beast: Finance Capitalism and the Spread of Pension Privatization in Europe
Marek Naczyk, Department of Social Policy and Intervention, University of Oxford
Bruno Palier, Centre d’Etudes Européennes, Sciences Po Paris
Paper prepared for the RC conference in Budapest, August 2013.
1
Abstract
Why have private retirement savings accounts expanded in almost all European countries
since the mid-1980s? Whereas analysts of pension reform in affluent democracies have
traditionally considered the development of private pensions as a secondary outcome of
welfare state retrenchment, we argue that governments have actively promoted their
expansion due to the heightened competition between European financial centers that has
accompanied the liberalization and internationalization of capital markets since the mid1970s. Stock exchanges, together with other financial services organizations, have started
lobbying for pension privatization because, by creating a vast and steadily growing pool of
financial capital, private pension funds have played an essential role in strengthening the
competitive position of their home country as an international financial center. Policy-makers
have in turn been attracted to pension privatization because a strong financial center could
provide their country with greater investment capacities and help create new jobs at a time of
deindustrialization. As both market and political actors have observed policy developments in
peer countries, the politics of pension privatization has been marked by strong international
interdependence and patterns of international diffusion. We support our argument with case
studies of pension reform in four very different cases, namely Britain, France, Germany and
Poland.
2
Introduction
Over the past three decades, European old-age pension systems have been marked by a move
away from the pay-as-you-go method of financing towards greater reliance on funding1 and
by a shift from defined-benefit to defined-contribution pensions2. Remarkably, this
transformation has affected countries which initially had very different pre-existing pension
systems (Immergut et al. 2007; Ebbinghaus 2011). Thus, Britain and Switzerland, both of
which historically had basic public pensions and relatively extensive employer-provided
defined-benefit plans, started cutting public benefits and fiscally stimulating “personal”
defined-contribution pensions in the mid-1980s. They were followed during the second half of
the 1980s by Belgium, Denmark, France, Spain and Portugal, all of which introduced tax
incentives for private retirement savings before they even started cutting – later in the 1990s –
their relatively generous pay-as-you-go benefits. By contrast, other countries – including
Norway, Italy or Germany – combined the retrenchment of their public defined-benefit
pensions with the active promotion of individual retirement savings accounts either in the
1990s or the early 2000s, with Sweden and a few East European countries even making
coverage of private personal pensions mandatory (Orenstein 2008). How can we explain this
general trend towards pension privatization?
Influenced by Paul Pierson’s (1996; 2001) “new politics of the welfare state”, political
scientists have traditionally considered that the first objective of contemporary pension reform
in affluent democracies has been to cut public benefits and to curb social expenditure.
Conservative and neo-liberal politicians have been assumed to have launched an assault on
the interventionist welfare state, primarily because they have seen it as an impediment to
economic growth and individual freedom (Pierson 1994). Other politicians have started
restricting social rights putatively because adverse economic and demographic conditions –
such as the slowdown in economic growth associated with the shift from manufacturing
industries to the generally less productive service sector and the changing ratio between
pensioners and the working age population – have created fiscal pressures and a climate of
“permanent austerity” that make it increasingly difficult for governments to honor their
pension commitments (Pierson 1998; 2001; Bonoli 2000; Bonoli and Shinkawa 2005;
Häusermann 2010). This “new politics” perspective has generally assumed that private
1
In “pay-as-you-go” systems, pensions are financed through direct transfers from the working-age population to
In “defined-benefit” plans, pensioners are guaranteed a set level of the salaries they used to earn as workers,
whereas with “defined-contribution” plans individuals are offered only what the contributions they have paid
into the system, plus returns.
2
3
pensions and the market are there only to fill the gap left by shrinking public pension
provision (see also Bonoli and Palier 2007). Moreover, a shift to greater private funding has
been thought unlikely because it creates an additional burden on workers as it requires that
they “continue financing the previous generation’s retirement while simultaneously saving for
their own” (Myles and Pierson 2001: 313). Why have governments nevertheless decided to
actively – i.e. fiscally – encourage the development of private pensions, thereby accepting to
lose tax revenue at a time of growing fiscal pressures? Why have they also sometimes done so
before cutting public pensions?
In this paper, we argue that governments have been increasingly attracted to pension
privatization because, in a context of deindustrialization and simultaneously of growing
internationalization of finance, they have seen it as a means to increase the competitiveness of
their domestic financial industries and therefore to boost their countries’ economic growth. A
crucial role in persuading policy-makers to follow this policy has been played by lobbying
campaigns launched by financial sector groups. Financial firms such as insurance companies
or mutual funds had a strong a priori motive for developing a market in funded pensions,
since it should profit them as an industry. However, we argue that a major impetus for
pension privatization in Europe was given by American authorities’ decision in the mid-1970s
to liberalize financial markets and capital movements. While the US initiative created a
competitive dynamic that eventually led other countries to open up their financial systems, it
also spurred European financial services organizations, in particular stock exchanges, to press
more actively for the expansion of private pensions. These actors argued that, by ensuring
stable inflows of capital, private pension funds could increase both the depth and liquidity of
the domestic capital market, thereby providing a crucial ingredient for the attraction of
increasingly mobile financial capital and the creation of new growth opportunities for the
whole domestic financial services industry. Thus, although financial sector groups have
pushed for policy changes at the domestic level, pension privatization in Europe has been
characterized by international interdependence and diffusion, as market actors and
governments have been strongly influenced by institutional developments in peer countries.
Our argument is developed further in the next section. We then support our claims with
a comparative historical analysis of contemporary pension reform in four very different cases,
namely Britain, France, Germany and Poland. The final section concludes and draws the
implications of our findings for research on welfare state reform around the globe and on the
financialization of different varieties of capitalism.
4
Private Pensions, Changing Growth Models and the Battle for Leadership in European
Finance
While in recent years students of pension reform in affluent democracies have
overwhelmingly investigated the political processes leading to benefit cuts and have seen the
privatization of pensions as a secondary outcome of welfare state retrenchment, analysts of
social policy change in middle-income countries have started shedding light on governments’
positive motivations in promoting the development of private pension funds (Müller 1999;
Madrid 2003; Weyland 2005; 2007; Orenstein 2008; Brooks 2009). This different analytical
focus is not surprising because, by deciding to divert part of their social security contributions
towards mandatory individual – and private – retirement savings plans, a number of middleincome countries, particularly in Latin America and in Central and Eastern Europe, have gone
furthest in privatizing their pension systems.
A widely held view among these scholars has been that, in policy-makers’ mind, the
expansion of private retirement savings had benefits of its own and could especially help
stimulate economic growth. In middle-income countries whose development had been
traditionally state-led and where private capital was typically scarce, pension privatization
was seen as a way to increase domestic savings and to create a stable base of domestic
institutional investors who would improve companies’ access to investment capital.
Moreover, by developing domestic capital markets and by signaling governments’
commitment to market-oriented reforms, private pension funds could help improve the
confidence of increasingly footloose foreign – institutional or direct – investors and therefore
diminish the risk of capital flight (see also Brooks 2002; 2007).
In this paper, we build on these insights. However, while analysts of pension reform in
Latin America and in Central and Eastern Europe have exclusively emphasized the role
played by international financial institutions such as the World Bank and by reformist finance
ministry bureaucrats in bringing pension privatization on the political agenda, we propose
another causal mechanism to explain why European governments have promoted the
expansion of private retirement savings.
Orenstein (2008; see also Müller 1999 and Madrid 2003) has shown how a transnational
network built around the World Bank contributed to diffuse the pension privatization
paradigm around the globe. The international financial institution published in 1994 a highprofile report entitled Averting the Old-Age Crisis in which it suggested that governments
should radically cut what it considered as financially unsustainable public pensions and partly
5
replace them with mandatory individual retirement savings accounts. The World Bank (1994:
9; 13) strongly insisted that mandatory funded pensions were “an instrument of growth” as
they would “increase capital accumulation” and “stimulate a demand for (and eventually
supply of) long-term financial instruments – a boon to development”. However, as
emphasized by Orenstein, the campaign for pension privatization launched by the World Bank
was primarily directed at developing countries. Moreover, the wave of pension privatization
hit Western Europe already in the mid-1980s – i.e. well before it affected other regions of the
globe.
Reformist bureaucrats, particularly those working in ministries of finance, are the
second type of actors that have been considered as crucial in promoting private pension funds
in middle-income countries. Since these actors have traditionally been in charge of regulating
the financial system and of catering for the financing needs of the state, they have very often
been attracted by pension privatization’s long-term promise to raise domestic savings and
build stable capital markets (Müller 1999; Mesa-Lago and Müller 2002; Madrid 2003).
Nevertheless, Brooks (2009) has highlighted that finance ministry bureaucrats have also been
responsive to concerns about the short- and medium-term costs of reforms: since governments
typically promote private pensions through generous tax deductions or more radically through
a diversion of social security contributions towards private pension funds, pension
privatization threatens to result in a significant loss of revenue for the state budget and can
consequently increase sovereign debt and harm sovereign creditworthiness. Technocrats have
therefore often “advocat[ed] for governments to curtail, if not forego altogether, pension
privatization” (Brooks 2009: 67). In affluent democracies’ climate of “permanent austerity”,
this type of trade-off between long-term benefits and short-term costs can also be expected to
have impacted Finance Ministries’ attitude towards pension privatization. What has
nevertheless tipped the balance to governments agreeing to introduce fiscal incentives for the
development of pension funds?
We argue that the driving force behind pension privatization in Europe has been the
heightened competition between European financial centers that accompanied the gradual
liberalization and internationalization of capital markets from the mid-1970s. Financial
services organizations started lobbying politicians to develop private pension funds because,
by creating a vast and steadily growing pool of capital, these were an essential element in
strengthening the competitive position of the domestic financial services industry. Policymakers, including Finance Ministries, were in turn attracted to the idea because a strong
6
financial center could provide their country with greater investment capacities and help create
new jobs at a time when traditionally dominant manufacturing industries started declining.
The impulse that prompted this process was American authorities’ move in the mid1970s to liberalize their domestic financial markets. Between 1973 and 1975, the United
States decided almost simultaneously to abolish its restrictions on capital flows, to induce US
pension funds to diversify their portfolios internationally3 and to deregulate brokerage
commissions on the New York stock exchange. These decisions put other countries – initially
Britain and Japan, later other European nations – under pressure to liberalize their capital
markets as they did not want their own financial centers to lose business and capital to New
York (Helleiner 1994; Simmons 1999; 2001). In Western Europe, the internationalization of
financial markets was further promoted by the European Economic Community’s push from
the mid-1980s for the creation of the Single Market in financial services and the full
liberalization of capital movements by 1992 (Abdelal 2007). In addition to these exogenous
shocks, governments were also pressed to liberalize their financial systems due to large –
often multinational – firms’ growing need to tap international capital markets and because of
a perceived need to diversify the sources of funding for small- and medium-sized enterprises
(Goodman and Pauly 1993; Deeg 2009).
At the same time as capital markets were liberalized, financial services organizations
began vigorously campaigning for the development of defined-contribution private pension
plans. Firms – such as life insurance companies, mutual funds and banks – that sell savings
products had a natural incentive to press for pension privatization, since they could be the
main potential providers of retirement savings plans (Leimgruber 2008; 2009; 2012;
Kemmerling and Neugart 2009; Meyer and Bridgen 2012; Naczyk 2013). However, a pivotal
actor was stock exchanges. Comparative political economists have often seen stock exchanges
as a relatively passive object of distributional struggles between different interest groups and
political parties (Roe 2006; Pinto et al. 2010). But they are in fact political actors in their own
right. And they can be quite powerful, as they act as a hub for a city’s or a country’s whole
securities – and more generally financial services – industry (Wójcik 2009; 2011; see also
Engelen and Grote 2009; Cassis 2010; Callaghan and Lagneau-Ymonet 2012). In a context of
internationalization of capital markets and of increased competition between financial centers,
stock exchanges have had strong incentives to lobby for the expansion of private retirement
savings. By ensuring regular inflows of capital and by creating a stable demand for assets,
3
Through the Employment Retirement Security Act (ERISA) of 1974.
7
pension funds’ presence reduces both issuers’ and investors’ uncertainty as to whether the
shares or bonds they sell will indeed find purchasers or will be correctly priced, and thus
considerably increases a stock exchange’s appeal to issuers and investors. Stock exchanges
have therefore considered – and presented – pension funds as a necessary ingredient for their
cities to be able to establish their position as an influential international financial center.
Despite the loss of tax revenue associated with the introduction of fiscal incentives for
private retirement savings, politicians have seen considerable benefits in the policies
advocated by financial sector groups. Not only – as has been emphasized by students of the
politics of pension privatization in middle-income countries – could pension privatization
form a large pool of capital that could help stimulate business or public-sector investment.
But, perhaps more importantly, it promised to help the domestic financial services industry to
strengthen its competitive position in a situation where, due to the internationalization of
capital flows, both market actors and policy-makers expected the provision of financial
services to become increasingly concentrated in a few dominant international financial
centers. If a government managed to build such a center in its own country, it could be
credited with generating a new source of economic and job growth, which had the potential to
offset the decline of traditionally dominant manufacturing industries and could eventually
bring in new tax revenue for the state.
In sum, we argue that the diffusion of pension privatization in Europe needs to be
understood in the context of growing internationalization of finance. As capital markets were
opened up, stock exchanges and other financial sector firms started calling on governments to
develop private retirement savings, and this in order to give the domestic financial services
industry a competitive edge in the global competition for capital. Politicians were in turn
attracted by this policy, as they were under pressure to find new sources of economic growth
in times of deindustrialization. By proposing an explanation for the active promotion of
private pensions by governments, our theoretical perspective significantly differs from the
existing literature on pension reform in affluent democracies, which has focused almost
exclusively on the politics of cuts in public pension provision. Note that, while we emphasize
the positive reasons for politicians to promote pension privatization, governments’ efforts to
do so have often met with strong opposition from other social groups such as trade unions
(e.g. Bonoli 2000; Bonoli and Palier 2000; Häusermann 2010) or also employers’ associations
(Naczyk 2013). Such countervailing forces help explain why the timing and the extent of
pension privatization have differed from country to country, but, for the sake of parsimony,
we treat them as exogenous to this paper’s theoretical model.
8
The Rise of Defined-Contribution Pensions in Four European Countries
We now turn to illustrating our argument with case studies of contemporary pension reform in
Britain, France, Germany and Poland. Before pension privatization started spreading in the
1980s, these four countries all had very different pre-existing pension and financial systems –
two characteristics that could have significantly constrained their reform trajectories. Britain
traditionally had an already elaborate system of private pension plans whose assets were
overwhelmingly invested on the well-developed London Stock Exchange. But these pension
funds were occupational plans of the defined-benefit – and not of the defined-contribution –
type. By contrast, both Germany and France had predominantly pay-as-you-go pension
systems with only a very marginal role played by funded plans. Moreover, their financial
systems were primarily credit-based, because firms financed most of their activities through
bank loans rather than through the capital markets as in Britain (Zysman 1983). The
difference between the German and French financial systems lied in that in the former the
banking system was largely in the hands of the private sector, whereas in the latter it was
controlled to a much larger extent by the state, as the largest banks were state-owned and the
French Treasury could exert considerable discretionary powers over the allocation of credit.
The fourth case, i.e. Poland, allows us to test our theory beyond the group of affluent West
European democracies, in a country that was a centrally planned economy and had fully statecontrolled pension and financial systems until 1989.
Despite these initial differences – and as has been the case in most of Europe (see Table
1) –, all four countries decided to promote fully-funded defined-contribution pensions
between the 1980s and the 2000s. The United Kingdom largely unleashed the wave of
pension privatization in Europe when in 1986 the Conservative Thatcher government made it
possible for individuals to opt out either of their defined-benefit occupational schemes or of
the “state earnings-related pension scheme” (SERPS) and join defined-contribution “personal
pension” plans. The expansion of defined-contribution pensions in Britain was then continued
by Tony Blair’s Labour government with the introduction of “stakeholder pensions” in 2001
and the enactment in 2008 of a system of “automatic enrolment” of workers in employersponsored private pension plans. France was also one of the first European countries to
promote defined-contribution pensions, since as early as 1987 the right-wing Chirac
government introduced a law that created tax incentives for individual retirement savings
accounts. However, the left repealed it two years later and it was only in the early 2000s that a
9
stable legislative framework for private pension funds was introduced in France. In
comparison with other European countries, Germany’s push for pension privatization came
relatively late, as the left-wing Schroeder government introduced tax deductions and state
subsidies for approved retirement savings accounts only in 2001. By contrast, Poland became
in 1998 one of the first European countries to have partly replaced its public pay-as-you-go
scheme with mandatory defined-contribution retirement savings plans.
Table 1 – First piece of legislation on defined-contribution plans in Europe
Year
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Voluntary
(Quasi)-Mandatory
CH*
(US)
CH**
BE, UK
DK, ES, FR
PT
NO
SE, IT, HU
CZ
SK
PL
DE
IE
AT
SE
HU, PL
EE, KV, LV
BU, HV, LT, MK, RU
SK, RO
UK
FI
*constitutional change
**legislation implementing constitutional change
Notes: West European countries in bold; Central and Eastern European countries in italics
Sources: Immergut et al. (2006); Ebbinghaus (2011); Orenstein (2013) and own research
10
The following country subsections will show how throughout the last three decades
pension privatization was driven by financiers’ and politicians’ ambition to turn their
countries’ financial capitals into one of Europe’s leading financial centers, and how reforms
introduced in one country could affect the political agenda in other countries.
Britain
When the United States decided to remove its capital controls program and to liberalize
its financial markets in the mid-1970s, the first major foreign country to respond was Britain.
With the growth of the Eurodollar and Eurobond markets in the 1950s and 1960s, the City of
London had managed to re-establish itself as one of the world’s pre-eminent international
financial centers (Helleiner 1994; Burn 1999). However, US authorities’ decision
considerably increased the attractiveness of Wall Street in international financial transactions.
In order to avoid losing business to New York, British financial institutions pressed
politicians to lift all exchange controls, with the chairman of the London Stock Exchange
(LSE) – Nicholas Goodison (1977) – arguing that this was “the obvious chance to rebuild our
international reputation and create even greater confidence overseas”. Margaret Thatcher’s
government made a move in this direction when it came to power in 1979. In 1983, it also
made a deal with the LSE to liberalize and modernize financial markets, including by
abolishing fixed minimum commissions on securities transactions (Laurence 1996; Vogel
1996: 93-108). The agreed changes came into effect in October 1986 through the so-called
“Big Bang” and, as they were accompanied by the privatization and the listing of a number of
large state-owned enterprises, they contributed significantly to raise the profile of London as
an international financial center.
In parallel with the liberalization of Britain’s financial markets, the LSE started
campaigning for regulatory changes in the country’s pension system. Although the United
Kingdom had a well-established network of occupational pension plans that invested their
monies in the domestic capital markets, the LSE highlighted from the mid-1970s the need to
introduce tax incentives for individual retirement savings and for share buying by small
investors (Wilson Committee 1978: 233; Financial Times 1982). Since the Second World
War, the leading US and UK financial markets had both gradually become dominated by
institutional – instead of individual – investors (Drucker 1976; Plender 1982). But stock
exchanges increasingly saw this situation as unfavorable because it could affect capital
11
markets’ liquidity. Moreover, the deregulation of brokerage commissions was expected to
drive small investors even further away, as they would have to pay higher charges than
wholesale institutional investors. Since the New York Stock Exchange had managed to
receive a new influx of retail investors after Congress introduced tax-deductible Individual
Retirement Accounts (IRAs) in 1974, the LSE felt under pressure to introduce similar
institutional arrangements in order to be able to retain an important role for small investors
and remain competitive4.
The issue of the institutional design of private pensions became even more pressing for
the Stock Exchange after the lifting of exchange controls in 1979. As the Trade Unions
Congress and the Labour Party opposed the free movement of capital, they started suggesting
that occupational pension funds and insurance companies should be forced to invest a
significant part of their assets in a National Investment Bank in order to support British
manufacturing industries (TUC 1979). Shifting the management of retirement savings from
financial institutions to individuals could thus help avoid a situation in which private pensions
would fall under the control of unions and stop regularly supplying the stock exchange with
new funds.
The LSE’s proposals started influencing the political agenda, when just before the 1983
general election the Centre for Policy Studies (CPS) – a free-market think tank with close ties
both to the Thatcher government and to the business and financial communities – suggested
that workers should be allowed to opt out of their defined-benefit occupational pension
schemes – which gave individuals only “ownership at second hand” (CPS 1983: 1) – and
should “be given the chance to run their own personalised pensions” (Ibid.: 2) through
defined-contribution “personal and portable” plans. Tory elites were clearly concerned about
the impact of trade unions’ ideas on the competitiveness of the British economy and capital
markets. During an electoral speech, the Prime Minister said that the TUC and Labour were
planning to “re-nationalise everything that has been de-nationalised by this Government. And
how will they pay for this vast state grab? Well, they’ve got their eyes on your pension
scheme and your life assurance” (Thatcher 1983). Later, the Trade and Industry Secretary,
Leon Brittan, would declare that “Labour's proposals for securing the repatriation of capital
invested overseas by pension funds and other institutions would destroy the City of London as
a leading financial centre” (Financial Times 1985).
4
Interview, former chairman of the London Stock Exchange, August 1st 2012.
12
After it won the 1983 general election, the Thatcher government set up a working group
to investigate the possibility of introducing personal pensions. However, it rapidly emerged
that it was not necessarily intent on following the CPS’s plan to transfer the management of
retirement savings from institutional to individual investors, as the working group on personal
pensions was dominated by private insurance companies (Financial Times 1984). Through the
Social Security Act 1986, the government eventually introduced strong financial incentives
for workers to save in “personal pensions” managed by financial institutions – such as
insurance companies or banks – while at the same time opting out of their occupational plans
or of the “state earnings-related pension scheme” (SERPS)5. However, the same year, the
Treasury also introduced significant tax incentives for “personal equity plans”, which were
more in line with the institutional changes demanded by the London Stock Exchange (see also
Goodison 1986).
The City’s influence on Britain’s pension policy-making was further demonstrated by
the shift in the Labour Party’s attitude towards pension privatization in the 1990s. Indeed,
while in 1990 Labour was still openly hostile to personal pensions (The Guardian 1990), by
the mid-1990s it accepted to promote the expansion of private defined-contribution pensions
and to reduce the role of SERPS. When claims arose about the “mis-selling” of personal
pensions to individuals who would have been better off staying in their occupational plan or
in SERPS (see Jacobs and Teles 2007), the Labour Party’s City spokesman wrote that
“dramatic disruption [in regulation] would not serve any useful purpose”, arguing among
other things that “the financial sector is crucial to Britain” as “it contributes nearly 18 percent
of GDP and employs about 2.5 million people. Britain is in many respects the world leader in
the provision of financial services” (Darling 1995). To remedy the deficiencies of personal
pensions, Tony Blair’s government promoted from 2001 the expansion of low-cost definedcontribution “stakeholder pensions” after seeking the cooperation of insurance companies for
their implementation (The Sunday Times 1996)6. Furthermore, as the Association of British
Insurers and the National Association of Pension Funds pushed throughout the 2000s for
government measures to help reduce Britain’s retirement “savings gap” (The Times 2002;
Meyer and Bridgen 2012), New Labour introduced in 2008 a form of “soft compulsion”
through the “automatic enrolment” of workers into employer-sponsored funded pension plans.
5
Although “new politics” analyses of British pension reform have seen the introduction of personal pensions as
initially motivated by a will to curb the welfare state (Pierson 1994), it was only in the winter of 1984/1985 that
Conservatives started linking the two issues and suggested that employees should be able to opt out not only of
occupational pensions but also of SERPS in order to save in personal pension plans (cf. Fowler 1991: 211-216).
6
Interview, Mark Boléat, former director-general of the Association of British Insurers, June 8th 2012.
13
France
As in Britain, pension privatization was put on France’s political agenda in the context
of significant changes in that country’s financial system. After the Second World War, French
technocratic elites had put in place a system of state-controlled banking in order to be able to
spur investment in favored industries (Zysman 1983; Hall 1986). However, in the 1970s, this
dirigiste system was increasingly criticized for propping up “lame ducks” in declining
industries and for stifling the development of small- and medium-sized enterprises (Berger
1981). In order to loosen the ties between government and industry, liberal politicians such as
Valéry Giscard d’Estaing and Raymond Barre attempted to gradually increase the role of the
stock exchange in the financing of large companies (Zysman 1981: 260-264). But this
promotion of capital markets was also motivated by on-going talks from the late 1960s about
the liberalization of capital movements within the European Economic Community (EEC; see
Abdelal 2006: 10) as well as by French politicians’ worries over how the EEC’s enlargement
to Britain would affect continental countries’ financial systems and centers. Finance Minister
Giscard d’Estaing openly spoke about his ambition to turn Paris into the continent’s leading
financial center or even to “put it on a par with the City of London” (Le Monde 1972) and
tried to woo foreign institutional investors to the Paris stock exchange (Financial Times
1972). Although a Socialist government unsuccessfully tried to reassert state control over the
financial system between 1981 and 1983 (Machin and Wright 1984), the liberalization process
continued unabated from 1983 and was given a decisive push in 1986-1987 when the rightwing Finance Minister, Edouard Balladur, launched a “little Big Bang” (Cerny 1989), which,
as in London, included the deregulation of brokerage commissions and was accompanied by
the loosening of capital controls and by an ambitious program of privatizations.
The liberalization of the French financial system coincided with calls from the financial
sector to develop funded pensions in France’s largely pay-as-you-go pension system. The
insurance industry was particularly active with that regard. For instance, in 1979, France’s
largest insurance company – the UAP – launched an aggressive advertising campaign that
targeted pay-as-you-go schemes and used the following slogan: “Babies born in 1949, don’t
count too much on babies born in 1979 to pay for your pensions”. The industry found a
powerful spokesman in Raymond Barre, France’s right-wing Prime Minister from 1976 until
1981. At the same time as he tried to promote the expansion of capital markets, Barre argued
that “the superstructure of the system of social benefits” had to be made “compatible with the
14
country’s economic and demographic infrastructure” (Le Monde 1978). Barre had been the
first president of the Geneva Association, an organization that was founded in 1973 by senior
continental and British insurers and has ever since acted as the insurance industry’s global
think tank (Leimgruber, 2009; 2012). The association also financed a study written by two
junior French economists – Denis Kessler and Dominique Strauss-Kahn – which received
considerable attention when it was published as a book (e.g. Le Monde 1982). The essay
made a case for developing private pension funds and argued that an “obvious advantage” of
pension privatization was that it would “create an inflow of long-term savings that is easy to
direct and tax” (Kessler and Strauss-Kahn 1982: 11).
Arguments in favor of pension privatization struck a chord both on the right and the left
of the political spectrum. Only two years after the Socialist President François Mitterand
fulfilled his electoral promise to decrease the minimum retirement age from 65 to 60 years –
and ten years before the first significant attempt at pension retrenchment (cf. Bonoli 2000),
the socialist Minister of Social Affairs, Pierre Bérégovoy, expressed his interest in the
introduction of fiscal incentives for private retirement savings saying that “we will be able to
distribute more only if we create the conditions for new economic growth… We must invest
in progress and therefore save” (Le Monde 1983). In 1985, already as Finance Minister,
Bérégovoy gave his nod to a bill submitted by a Socialist MP – although ultimately rejected
by the left-wing parliamentary majority – to create such tax incentives (Le Monde 1985). Tax
deductions for “retirement savings plans” (plans d’épargne pour la retraite – PERs) were
eventually introduced as part of a “law on savings” passed in June 1987 – that is roughly at
the same time as the Paris Bourse was undergoing its “little Big Bang”. The PERs were
voluntary defined-contribution plans explicitly modeled on American “Individual Retirement
Accounts” (IRAs), although both banks and life insurance companies were also allowed to
manage them. When he presented the rationale for introducing the bill, Finance Minister
Edouard Balladur declared that: “Contrary to many other countries where funded pensions
play a very important role in household savings and in supplying financial markets, this type
of savings does practically not exist in France” (Le Monde 1986).
However, due to the October 1987 stock market crash, the PERs developed below
expectation. The Socialist Party decided to repeal them when it returned to power in 1988.
Politicians were in fact put under considerable pressure to oppose pension privatization
because both trade unions and parts of organized business considered that funded pensions
were a direct threat to private occupational pay-as-you-go schemes they managed together
(Naczyk 2013). Given this temporary setback, the financial services industry continued
15
lobbying hard for the introduction of legislation on pension funds. An important role was
played by the French Association of Investment Firms (AFG – see Bollon and Cossic 1997)
as well as by the Paris Europlace lobby, which was created by the Paris stock exchange and
other parts of the French business and financial communities – including France’s central
bank, the Banque de France – in the wake of the signing of the 1992 Maastricht Treaty in
order to help promote Paris as the leading financial center of the European Economic and
Monetary Union (EMU). According to the head of the Paris Bourse, Jean-François Théodore,
private retirement savings were needed because they would be “the big booster” (The
Observer 1991) and provide Paris with “an extra engine, an extra turbo, which will give it
even more strength” (Reuters 1994a). In a similar vein, Denis Kessler – now head of the
French Federation of Insurance Companies (FFSA) – argued that funded pensions constituted
the “sinews of war in modern capitalism” (Le Monde 1994). It was nonetheless only once an
agreement was found with trade unions and employers’ associations on the future of the payas-you-go occupational schemes that a more stable legislation on private retirement savings
was introduced, first with the passage of a “law on salary savings” by a Socialist government
in 2001 and later with the enactment of the 2003 Fillon pension reform by a right-wing
majority (Palier 2007; Naczyk and Palier 2011; Naczyk 2013).
Germany
For a long time, Germany lagged behind other European countries in encouraging the
development of private pension funds and more generally that of financial markets. The postwar German political economy was based on a strong relationship between banking and
industry, as large firms financed themselves primarily through loans provided by “universal”
banks, which could in turn supervise their corporate clients through the equity stakes they
held in them (Zysman 1983; Hall and Soskice 2001). Capital markets played only a marginal
role in the financing of German businesses. Nevertheless, the situation started changing in the
mid-1980s and this for two reasons. First, due to a growing tendency for large firms to selffinance and to be less dependent on the banking system, big commercial banks – including
Germany’s largest one, the Deutsche Bank – started seeking new business opportunities and
shifting their focus on activities related to capital markets such as underwriting and trading
(Deeg 2005: 179). Second, the EEC’s push for the creation of the Single Market as well as
Britain’s and France’s efforts to promote London and Paris respectively as Europe’s leading
financial centers heralded a new era for European financial services. These two types of
16
changes led parts of the German financial services industry to be increasingly interested in the
promotion of domestic capital markets and especially in the merger of the hitherto
decentralized system of regional stock exchanges into a single German-wide entity to be
based in Frankfurt (Moran 1994: 171-175; Vogel 1996: 250-253; Lütz 1998). The EEC’s
decision in 1992 to install Frankfurt as the location for the nascent European central bank, the
European Monetary Institute, gave an even greater impetus to the Finanzplatz Deutschland
(“Financial Center Germany”) campaign, which was supported by German federal authorities
through the passage of four “financial market promotion laws” between 1990 and 2002 (Lütz
2005: 150).
The German financial community’s efforts to promote Frankfurt as an international
financial center led them to pay extra attention to the institutional design of the domestic
pension system. Since Germany’s predominantly pay-as-you-go system had left some space
for the development of occupational pension plans (Ebbinghaus et al. 2011), financiers
initially concentrated on changing the regulations that governed these existing plans. Unlike
in Britain or in the US, occupational pension funds – but also the German insurance industry –
were traditionally not equity-minded. Consequently, the Federation of German Stock
Exchanges – created to pave the way for the unification of the regional stock exchanges7 –
pressed at the end of the 1980s for an easing of government regulations that limited the
amount of assets that these institutional investors could invest in shares (Reuters 1989).
According to the Federation’s head, Rüdiger von Rosen, such limits were “a curious state of
affairs for a country with one of the world’s most prosperous economies and which is trying
hard to make its financial markets more attractive and efficient. The mobilisation of domestic
institutions would contribute to a further strengthening of the stock market” (Financial Times
1987).
However, after the choice of Frankfurt as the location of the future European central
bank considerably increased the city’s chances of becoming the continent’s leading financial
center, the German financial services industry launched a more determined campaign for the
development of defined-contribution retirement savings accounts. Rolf Breuer, the chairman
of the newly created Deutsche Börse AG and head of Deutsche Bank Capital Markets, argued
that “the Economic and Monetary Union will lead to the disappearance of the worst
performing stock exchanges. (…) The future belongs to those who will have the most efficient
pensions market” (Reuters 1996). The German Insurance Association (GDV) called on the
7
German stock exchanges were eventually unified into the Frankfurt-based Deutsche Boerse AG in 1993.
17
government to “clarify the role of private insurance as a security partner and pillar of pension
provision” (Süddeutsche Zeitung 1995) and contended that “the same pension can be financed
with less money, and our economy can use the expanding capital to invest in jobs” (Business
Insurance 1998). Other interest groups lobbying for pension privatization included the
Association of German Investment Firms (BVI - see also Wehlau 2009; Hockerts 2011: 307310), the Deutsches Aktieninstitut (DAI) – a think tank headed from the mid-1990s by
Rüdiger von Rosen – as well as Finanzplatz e.V. – an association created by Frankfurt-based
financiers in 1996 and directly inspired by the rival Paris Europlace initiative.
German policy-makers – in particular the Federal Ministry of Finance, some of whose
officials were associate board members of the Finanzplatz association (Boersen-Zeitung
1999) – were increasingly attracted by the potential economic benefits brought by pension
privatization. In response to the demands formulated by the Federation of German Stock
Exchanges in the late 1980s, the Ministry of Finance decided in 1990 to allow domestic
pension funds and insurance companies to invest up to 30 % of their funds on the equity
markets. In 1998, the third “financial market promotion law” created tax incentives for a new
type of retirement accounts for private investors. When the law was discussed in Parliament,
the Christian-Democratic Minister of Finance, Theo Waigel, said: “Globalisation is
continuing and the euro is coming. In the light of these developments we must strengthen our
financial markets further” (Financial News 1998).
However, the most significant push for pension privatization was given by the Riester
pension reform introduced by Gerhard Schröder’s left-wing coalition government in 2001
(Schulze and Jochem 2006; Jacobs 2011). Against strong opposition of trade unions, the
Social Democratic Minister of Social Affairs, Walter Riester, decided to significantly cut the
level of public pensions and simultaneously to offer generous tax-financed allowances to
those workers who would voluntarily save up to 4 per cent of their gross wages in definedcontribution pension accounts. Insurance companies successfully pressed for an increase of
the tax subsidy’s maximum amount from 250 to 500 German marks per person (Stuttgarter
Zeitung 2000; Schulze and Jochem 2006). Despite putting together an austerity package of 30
billion marks in 1999, Finance Minister Hans Eichel – who had previously been MinisterPresident of budget consolidation in the German state of Hesse, where Frankfurt is located –
agreed to a tax expenditure of up to 19 billion marks for private pensions, declaring that
“anything else would be unaffordable” (REF., 17/12/2000). After the Riester pensions were
introduced, the financial services industry continued lobbying for regulatory changes that
would help increase their take-up (Berner 2006).
18
Poland
As in Britain, France and Germany, the debate about pension privatization in Poland
arose in the context of major transformations in the country’s political economy. In 1990, the
first government to be democratically elected after the collapse of the communist regime
introduced a radical program of economic liberalization aimed at fostering a rapid transition
from a centrally planned to a market economy. Named after the Minister of Finance, the
“Balcerowicz plan” abolished price controls, liberalized international trade, allowed the
convertibility of the national currency and sharply tightened monetary and fiscal policy (see
Lipton and Sachs 1990; Balcerowicz 1995). This “shock therapy” also helped re-organize the
Polish financial system. Whereas under communism the financing of enterprises was
controlled by the central planners and credits were disbursed by a single state bank, the
Balcerowicz plan transformed the National Bank of Poland into a central bank responsible
solely for monetary policy and banking supervision. By contrast, a number of commercial
banks that had been carved out from this pre-existing mono-bank were put in charge of
commercial lending. However, due to these banks’ tight links with ailing state-owned
industrial enterprises, both Western advisers and domestic policy-makers questioned their
capacity to adequately fund the emerging private sector and supported the development of
strong domestic capital markets (Frydman et al. 1993: 188-192; Winiecki 1997). The creation
of the Warsaw Stock Exchange in 1991 – with substantial technical support from the Paris
Bourse – provided the stepping stone for doing so.
Poland’s nascent financial services industry started calling very early on for the
development of private pension funds. Lesław Paga, one of the founders of the Warsaw Stock
Exchange (WSE) and president of the Polish Securities and Exchange Commission, argued
that it was “absurd” that people with higher incomes got “so little when they went into
retirement” (Gazeta Wyborcza 1992). Stock exchange professionals were anxious that the
lack of domestic institutional investors and the dominance of retail investors made Polish
share prices very volatile. According to Wiesław Rozłucki, the head of the WSE, “the
shortage of domestic investment funds is a bottleneck. The market cannot develop further
based on retail investors” (Reuters 1994b). Warsaw was at the time starting to compete with
Hungary’s capital – Budapest – to become Central and Eastern Europe’s leading financial
center (Reuters 1995). But, pressed notably by the Budapest Stock Exchange (see e.g. The
Guardian 1991; MTI-Econews 1991), the Hungarian government had already introduced
19
regulations on voluntary retirement savings in 1993 and, by 1995, Finance Minister Lajos
Bokros – himself chairman of the Budapest Stock Exchange from its creation in 1990 until
1995 – was proposing to create mandatory individual retirement accounts for all Hungarian
workers (see Müller 1999). To put pressure on the Polish government, Rozłucki reminded, for
example, a newly appointed Prime Minister, during the latter’s visit to the WSE, that there
was “still no legislation” on the functioning of private pension funds (Gazeta Wyborcza
1995). Private insurers also called for social security reform and for the creation of tax
incentives to encourage the development of voluntary retirement savings plans (e.g. East
European Insurance Report 1993; Business Insurance 1994; see also op-ed by Commercial
Union’s head – Miziołek 1994). The industry had created its own lobby, the Polish Insurance
Association (PIU), as early as 1990.
Although a government led by the former anti-communist opposition had started
pondering the introduction of private pension funds (MPiPS 1993), a real impetus for pension
privatization was given following the appointment in 1994 of economist Grzegorz Kołodko as
Finance Minister by a post-communist government. After his nomination, Kołodko drafted a
program of economic reform entitled Strategy for Poland. During the preparation of the
document, Marek Mazur – a senior civil servant in the Ministry of Finance, but also chairman
of a state-owned commercial bank – suggested including the development of private
retirement savings (see Kołodko 1994: 55-57). Mazur subsequently started working on a
blueprint for pension privatization, but, since he was aware of the 1994 World Bank report, he
got in touch with the Bank’s officials and went on study trips to Latin America (see also
Müller 1999). As a result, in the spring of 1995, the Polish Ministry of Finance put forward a
reform proposal which closely resembled that of the World Bank in that it suggested radically
cutting the existing pay-as-you-go system and diverting part of social security contributions
towards mandatory defined-contribution funded pensions (cf. Orenstein 2008).
Thus, although Polish financiers had been pushing since the early 1990s for the
expansion of primarily voluntary retirement savings plans, the Ministry of Finance
contributed to put an alternative model of pension privatization on the political agenda. While
working on the issue, Marek Mazur also created a “Foundation for the Development of Social
Insurance” (FRUS) whose aim was in reality to promote the introduction of private retirement
savings. Poland’s two largest life insurance companies – PZU Życie and Warta Life – helped
him finance the undertaking8. In late 1996, the post-communist government created a special
8
Phone interview, 12/12/2012.
20
taskforce on pension reform headed by a Polish economist working at the World Bank (Chłoń
et al. 1999, Hausner 2001). The taskforce not only prepared the legislation on mandatory
“open pension funds”, but also help forge a political consensus on the reform, for example by
organizing study trips to the United States and to Latin America, to which it invited
government officials, unionists and journalists together with representatives of the financial
industry9.
When pension privatization was implemented in spring 1999, the new “open pension
funds” established a Polish Association of Pension Funds (IGTE). Together with the Warsaw
Stock Exchange, the IGTE regularly pressed Poland’s Treasury to step up the privatization of
state-owned companies, so as to increase the number of publicly listed companies and to
allow pension funds to diversify their portfolios. The close ties existing between these three
organizations were best symbolized by the adoption in 2004 of a government strategy called
Agenda Warsaw City 2010 whose aim was to transform Warsaw into Central and Eastern
Europe’s pre-eminent financial center after Poland’s entry into the European Union (MF
2004; Rzeczpospolita 2004). In 2009, for the tenth anniversary of partial pension
privatization, the former head of the Warsaw bourse, Wiesław Rozłucki, declared that, after
the creation of the stock exchange itself, the establishment of open pension funds had been
“the greatest event in the history of the Polish capital market” (Rzeczpospolita 2009).
Conclusion
Beginning in the late 1970s, both financial services organizations and policy-makers
started pressing more actively for the development of private pensions in different European
countries. This dramatic change was largely triggered by the growing competition between
European financial centers that resulted from the liberalization of financial markets and
capital movements. Pension funds were widely seen as a shot in the arm to those stock
exchanges and financial centers that aspired to play a leading international role in the
provision of financial services and wanted to attract increasingly footloose financial capital.
With its already very developed capital markets and London’s aspirations to compete with
New York for the position of the world’s dominant financial center, Britain was the first
European country – together with another hub of international finance, Switzerland – to
redesign its pension system. Other countries then took inspiration from the British reform and
9
Interview, former Minister of Social Affairs, 19/02/2010.
21
from institutional arrangements existing in the United States. When London’s “Big Bang”
directly threatened Paris’s ambition of becoming the continent’s leading financial center, the
French government reformed its capital markets in a similar way and tried to stimulate their
growth with individual retirement savings accounts. When the Frankfurt financial center
became a credible competitor for Paris in the 1990s, German authorities followed suit. Even
in a post-communist country like Poland was pension privatization driven by the battle for
international leadership in the provision of financial services, since Warsaw was competing
with Budapest – but also Vienna and Prague – to become Central and Eastern Europe’s
leading financial center.
Our approach and findings make significant contributions to political science research
both on welfare state reform and on institutional change in contemporary capitalism. The
paper has underlined a causal connection between pension reform and the liberalization of
financial markets that had been overlooked by students of welfare state retrenchment in
affluent democracies but also by analysts of pension privatization in middle-income countries.
The Polish case suggests that, even in countries with a rudimentary financial services
industry, financial sector groups can have a remarkable capacity to influence the political
agenda, especially as they have become one of governments’ key partners in attracting
internationally mobile capital. It would be worthwhile to reassess the role played by financiers
in the privatization of pensions in Latin America or Central and Eastern Europe, but also in
other regions of the world such as China or South-East Asia. More generally, there is still
much research to be done on the role of the financial industry in shaping other areas of social
protection such as healthcare, long-term care or sickness insurance.
The second important contribution our paper makes is to the emerging literature on the
“financialization” of capitalism. Echoing the words of former US Treasury Secretary
Lawrence H. Summers who claimed that “financial markets don’t just oil the wheels of
economic growth. They are the wheels” (US Treasury 1997), some comparative political
economists have argued that the financial services industry has increasingly striven to become
the lead sector in Western economies and has gradually imposed its ways of doing business
on other industries (Boyer 2000; Krippner 2005; 2011; Dore 2008; Davis 2009; Engelen and
Konings 2010). This paper has shown how financial firms have clearly seen pension
privatization as an essential ingredient for their growth as an industry. By uncovering the
arguments used by stock exchanges in pressing for pension privatization but also for other
institutional changes, we also contribute to highlight how the possibility for a country to
become a leading international financial center – and the attraction of this prospect both to
22
financiers and politicians – has been one of the key mechanisms through which the financial
sector has been able to become both economically and politically more powerful.
23
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