Do pension funds provide financial stability? Evidence from European Union countries

We investigate the relationship between pension funds and financial stability in 25 European Union countries for the period from 2001-2017. We find that pension funds significantly reduce financial stress in crisis and non-crisis times but only in strong governance countries, and those governed by the prudent man rule provide additional stability to these countries. However, their effect is destabilizing in weak governance countries. These findings point to an important policy implication: automatic enrollment programs aimed at increasing participation in pension plans can support the stability of financial markets in strong governance countries of the European Union.