Private Pensions, Public Investments: State Power at the Welfare-Finance Nexus

The paper explores the interconnections between public finance and private (funded) pensions. Both elements of the political economy are closely intertwined. Until the late twentieth century, pension funds in most mature three-pillar systems invested their assets predominantly in government securities. This arrangement worked to the benefit of both parties: pension funds could invest in relatively safe assets that generated stable returns, while the state had access to reliable long-term investors, who could relieve financial burdens and, in some cases, even serve as “financiers of last resort.” Several developments associated with the financialization of pension systems have placed this connection on its head: new investment practices associated with Modern Portfolio Theory, replacement of substantive investment regulations with open norm such as the prudent person rule, and the global presence of pension funds. As a result, public actors have lost direct access to pension capital for investment and have to resort to alternative means. This raises the question, under which political and economic conditions public actors can still successfully "capture" private pension assets. To answer these questions, the current paper interrogates several successful and failed instances of state capture of private pension assets in the Netherlands and the United States from the early 1980s until the financial crisis of 2008. The Netherlands and the United States are two political economies with mature three-pillar pension systems and legal tradition of the prudent person rule, thus representing most likely cases. Evidence is drawn from primary documents and semi-structured interviews with policymakers and pension professionals.