Sustainable pensions, democratic governance, and EU law

Publication Date01 September 2021
AuthorEwan McGaughey
Date01 September 2021
Sustainable pensions,
democratic governance,
and EU law
Ewan McGaughey
School of Law, King’s College, London & Centre for Business Research, University of Cambridge, Cambridge, UK
The quality of democracy in our economy depends on the governance of capital, but Europeans are
still deprived of real voice over their retirement money: the single biggest source of capital in the
21st century. This paper outlines three major problems facing EU pensions: precarious retirement,
escalating inequality, and mounting climate damage. These problems start with the places where
we work, the institutions that control our retirement savings, and the votes on shares that come
with them. The central argument is that pensions will only be sustainable once they are demo-
cratically, prudently, and loyally governed. First, member states have wide experience with co-
determination in capital funds, which can inform the basis of minimum standards in EU law for
‘pension fund democracy’. Second, a growing number of investment rules draw upon Member
States’ fiduciary duties and standards for prudence or care; but, these do not yet codify the
requirement that beneficiaries’ environmental, social, and governance preferences are followed.
Third, votes on shares - bought with pension fund assets - are still being cast by banks and asset
managers who manage ‘other people’s money’. This is a serious problem because banks and asset
managers have interests that systematically conflict with the ultimate investors: they vote in
companies on other people’s money and, at the same time, sell financial products (e.g., pensions) to
those companies. The problems are soluble with careful amendments to existing policy that ensure
elected representatives of pension beneficiaries are the sole determinants of voting policies, with
prudence and no conflicts of interest. A draft EU Directive, based upon emerging best practice, is
Climate damage, codetermination, democracy, environment, governance, pensions, prudent
person, voting
Corresponding author:
Ewan McGaughey, School of Law, King’s College, London, WC2R 2LS, UK.
European Journal of Social Security
ªThe Author(s) 2021
Article reuse guidelines:
DOI: 10.1177/13882627211030300
2021, Vol. 23(3) 279–297
The European Union is founded upon Member States’ desire to ‘deepen the solidarity between
their peoples’ and promote ‘an area of freedom, security, and justice’.
Of course, security and
justice at home is inseparable from security and justice in the world, and this has been seen in
international law for over a century.
This is why the ‘right to social security’ was placed at the
centre of the Universal Declaration of Human Rights 1948
Covenant treaties by all European nations.
‘Security’, including social security, is at the core of
the successful politics that any Union must deliver. The geopolitical disasters that have unfolded
since 2015, as well as Trump and Kremlin aggression, Brexit, Covid-19, and mounting climate
damage, are all intimately connected with insecurity. As Franklin D. Roosevelt once said, people
who are ‘hungry or out of a job are the stuff of which dictatorships are made’, and our best
defence is positive rights for ‘economic security, social security, moral security’, as well as
‘physical security’ (Roosevelt, 1944). Our systems of social security matter because they deci-
sively shape our management of capital, and capital exercises profound influence in the govern-
ance of our economy. Capital in the 21st century belongs to the people who save (Pikett y, 2014,
2020, reviewed in McGaughey, 2021); for our very geopolitical security, this can no longer be
This article’s central argument is that security and justice require sustainable pensions, and
pensions will be sustainable when they are democratically, prudently, and loyally governed.
Sustainable pensions are essential for ‘sustainable corporate governance’, a key goal of the EU’s
future agenda (DG Justice, 2021). Part 2 unpacks three main problems for sustainable pensions in
the EU. First, people face precarious retirement, particularly where public pensions are not
income-linked and occupational pensions are invested in companies for high asset management
fees. The character of pension systems determines the size and nature of the financial sector and
stock market and, like a loop, this itself influences pension provision. Second, there is escalating
inequality, which begins in wages and fuels the problems in pensions. Wage and pension inequality
result from an even greater inequality of votes in the economy, with votes often monopolised by
shareholders in companies. However, shareholders today are rarely the people who actually invest
or bear economic risk,
and control over shares is monopolised by banks and asset managers.
Banks and asset managers are usually carrying out investment services on behalf of people saving
for retirement through pensions, life insurance, or other collective investments. They take ‘other
people’s money’ and other people’s votes (cf Smith, 1776: Book V, ch 1, §107; Brandeis, 1914),
and their use of power has tended to exa cerbate inequality. Third, there is mounting climate
damage, bankrolled by a financial sector that refuses to divest from coal, oil, and gas and still
1. Treaty on European Union, preamble and Art 3(2).
2. cf Treaty of Versailles 1919, Part XIII: ‘Peace can be established only if it is based upon social justice.’
3. Universal Declaration of Human Rights 1948 Art 22.
4. International Covenant of Economic, Social and Cultural Rights 1966 Arts 9 and 10. Also, Charter of Fundamental
Rights of the EU 2000 Art 34(1): ‘The Union recognises and respects the entitlement to social security benefits....’
European Social Charter 1996 Art 12: members must ‘endeavour to raise progressively the system of social security to a
higher level’.
5. On the ‘myth of shareholder legitimacy’, see McGaughey, 2019: 745-748.
280 European Journal of Social Security 23(3)

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