PEPP: The pan-European personal pension product certified by the EU
Pan European Personal Pension Product certified by the EU: why such a product? Which providers will offer #PEPPs and what are the obstacles and challenges?
The financial crisis of 2008 resulted in a series of directives and regulations within the European Union (EU) intended, amongst other things, to better regulate the financial sector, protect investors, and promote growth and job creation.
Alongside these regulations, the question was raised about current and future pension schemes for European citizens. There are several pension schemes in Europe and they differ from country to country. These schemes include the standard state pension, plans taken out or offered by employers to their employees, and supplementary pension plans that people take out on their own initiative.
According to a study carried out in 2018 by the European Insurance and Occupational Pensions Authority (EIOPA)1, 27% of European citizens aged 25 to 59 years, or 67 million individuals, have taken out a supplementary pension plan.
In order to expand the current offering, in June 2017 the European Commission proposed establishing a pan-European personal pension product(PEPP). This is a non-professional, individual retirement product voluntarily taken out by savers for their retirement. It is designed to accumulate capital over the long term, with limited possibilities and potential penalties for early withdrawal.
Why a PEPP?
The primary objective of this product is to enable all European citizens to benefit from additional income when they reach retirement age, enabling them to live more comfortably.
The second objective is for economic reasons: financing companies through savings. The amounts invested in this kind of pension plan will fund a number of European projects for companies over the long term.
Investors may choose from six investment options offered by the PEPP provider at the beginning of the policy and will have the opportunity to change their choice at least once every five years. The European PEPP regulation stipulates that all investment options be designed “on the basis of a guarantee or a risk mitigation technique ensuring sufficient protection for PEPP investors”.
PEPPs also allow portability for accounts in the event that a saver moves to another country within Europe. Investors having recently moved to another Member State may open a sub-account within their PEPP: this is a national section corresponding to the legal requirements and the conditions of use related to any incentives set at the national level. Investors would then continue to subscribe via the retirement product that meets local requirements.
Which providers will offer PEPPs?
To be distributed, PEPPs will have to be registered in the central public register of the European Insurance and Occupational Pensions Authority (EIOPA).
Various investment providers can offer them, including insurance companies, asset managers, banks, professional pension fundsand investment firms providing portfolio management services, as well as European alternative investment fund (AIF) management companies and managers.
In addition to these traditional players, a new category of distributors has emerged with big tech (Facebook, Amazon) and fintech companies.
The ability to distribute PEPPs is seen by these players as an opportunity to penetrate the private pension market. We will therefore witness the diversification of service offerings, within big tech companies as well as even the smallest fintech companies. They will take this opportunity to offer a relatively cheap, innovative and sustainable product. We can expect to see partnerships established between these companies and asset managers.
Obstacles to making PEPPs a reality
Since 2012, the EU has adopted the necessary regulations to strengthen investor protection, so as to standardise all the activities of the financial industry.
The Capital Markets Union set up in 2015 stated its objective of creating more growth and jobs in Europe. It should be noted that this goal has not yet been fully achieved because growth has been below expectations.
Since the financial crisis of 2008, due to near-zero and even negative interest rates, European citizens have invested very little in financial products. Investors continue to prefer cash, bank deposits and real-estate investments in the current context of low returns on capital markets. This market diversion is a hindrance to the recovery of growth, as bank deposits already finance the real economy.
Will citizens looking to save over the long term for their retirement invest in PEPPs if there is no way to guarantee sufficient profitability or performance? Are the increasingly short economic cycles of current investments compatible with long-term financial investments?
Also, how do we know that this new product is not less effective than other national retirement savings products? Will it benefit from the same tax framework? Lastly, the PEPP regulation does not provide for transforming your existing national private pension plan into a PEPP.
Challenges for the EIOPA
The Pan-European Personal Pension Product Regulation was adopted on 20 June 2019 by the European Parliament and the Council of the European Union and was published in the EU Official Journal on 25 July 2019.
The EIOPA must still submit technical standards proposals to the European Commission for adoption via delegated acts. These ‘level 2’ technical measures are necessary to transpose the texts and distribute this new product.
To achieve this goal, the EIOPA launched a public consultation on the main aspects of the scheme on 24 February. The stakeholders of this consultation, such as asset managers and insurers, will thus contribute to the implementation of the PEPP regulation. A favourable regulatory framework adapted to European investors will then be introduced.
PEPPs: a solution to a potential future pension issue in Europe?
Pension schemes in Europe are complex and varied. The results of the history of each country’s social dialogue, they are based on three pillars: public income-related pension schemes, private professional plans and individual pension plans.
While the first pillar will continue to be the main cornerstone of the pension system, the Commission understands that most EU Member States have implemented reforms exploring other options.
Directive 2014/91/EU on pension funds applicable since January 2019, the deadline for transposing the directive into national law for EU Member States, demonstrates the European Commission’s desire to provide safer pensions at the European level.
The PEPP confirms this need to develop forms of supplementary retirement savings due in particular to the expected reduction in benefits from public pension schemes.
What about Luxembourg?
Within the EU, Luxembourg remains in the lead for domiciliation, distribution and services provided to investment funds2. This sector is growing and will continue to grow with the desire to increase employee savings and promote a European private or professional pension scheme.
With its recognised expertise in the management and distribution of UCITS, who better than Luxembourg – where 11 pension funds are currently domiciled3– to participate in the economic development of this new product? By capitalising on its expertise specific to European industry, the country could become a platform for the creation and distribution of PEPPs within the EU.
The obligations for PEPP providers to appoint a custodian bank will result in increased activity for custodian bank services. It seems there will also be opportunities for private banking and retail banking.
The total cost of a “basic” PEPP would be capped at 1% of the accumulated capital, well above the investment cost currently applied in Europe (30 to 40 basis points). One of the important conditions for the success of PEPPs is nevertheless their tax framework, which must be favourable. Given this condition and the fact that a number of clarifications are still expected, the first PEPP is not likely to emerge before 2022.
Article written on AGEFI Luxembourg.
To attend the Digital Conference of November 19, 2020 on pensions, IORP II, PEPP, with Jean-Pierre Gomez,click here.
UCITS: undertaking for collective investment in transferable securities
2 Source: ALFI (Association of the Luxembourg Fund Industry)
3 Source: ALFI