#PEPP: Pan-European Personal Pension proposal – ‘With PEPP, Europe grows further together’

The European Commission’s proposal of 29 June for a regulation that sets out common principles for a Pan-European Personal Pension (PEPP) product has been welcomed by #FinanceWatch and other commentators.

The global pensions gap is currently estimated at $70 trillion and forecasted to mushroom to $400 trillion by 2050: this is by far the biggest financial issue facing EU citizens, their children, and grandchildren.

With government pensions on the decline, and occupational ones covering only a minority of citizens and pension needs, all Public Authorities are asking EU citizens to save more and earlier for retirement. They are, surprisingly, omitting another crucial requisite for pension adequacy: decent net real (i.e. after inflation) returns. Compounded returns are the main – if often ignored – driver for pension adequacy.

Independent research into the real net returns of European pension savings has shown that fees and commissions severely hurt returns for pension savers. Pension savings products too often significantly underperform capital markets, and even sometimes destroy the real value of pension savings over the long-term. This in turn is due to the extreme fragmentation of the pension saving products markets within the EU, to the complexity and opacity of many products, and to insufficient competition.

According to Finance Watch, the association is supportive of the general intention of offering a safe, simple and transparent product that is accessible on a pan-European basis and, in particular, of some of the features of this new product that has been presented:

  • The proposal provides for a default option with capital protection and a limited number of alternatives, as suggested by Finance Watch.
  • Non-default options are subject to suitability testing – although we are missing the concept of a formal pathway for guiding investors, and advisors, along the decision-making process.
  • Portability is provided across the EU, following a three-year phase-in period, by way of national compartments – the complexity of that approach will need to be mitigated by increased transparency to ensure that savers can make full use of the benefits of this feature.
  • The product allows savers to switch providers at regular intervals and across borders – the proposed cap on switching fees is too high, however, and the basis for calculating it should be reformulated.
  • The product comes with a KID-style information document including metrics on past performance – we would expect further standards on these metrics and relevant benchmarks in due course to ensure transparency and comparability.

Finance Watch, however, also cite a number of points on which the proposal falls short of its expectations:

  • It is missing important features that we would expect from a genuine pension product: in particular it does not address longevity risk and does not guide savers towards a decumulation strategy that would provide for an income, i.e. in the form of an annuity. Member states are not given the choice to limit decumulation options or to promote prudent, income generating strategies over lump-sum pay-outs.
  • The proposal stops short of providing for an explicit capital guarantee as part of the default option and does not provide sufficient detail on the specifics of the proposed capital protection.
  • There are no limitations on the level of fees charged for either the advice on the sale of a PEPP or for its ongoing management. Caps, in particular on advisory fees at the subscription stage could prevent potential abuse and encourage take-up of the product. The regulation should, at least, set out a framework for the calculation of these caps, to be applied by the member states.
  • To support the product’s portability features, providers should be required to include, as part of their periodic reporting, a consolidated overview of savers’ accumulated capital and benefits including all relevant national compartments.
  • Lastly, the framework defers to sectoral legislation on setting prudential standards for PEPP providers. Given the diversity of regimes this could lead to an uneven level of protection for savers and an unlevel playing field among providers.

Commenting on the proposal, the economic and financial policy spokesman for the Greens/EFA Group in the European Parliament Sven Giegold said: “With a Pan-European pension product, Europe grows further together. It will be a great relief for European citizens to take their private retirement with them when they move to another country. The Pan-European pension would be the first truly European financial product for consumers. If the same rules apply to all providers, the consumer benefit from a genuine European competition among insurance companies.

“Currently, banks, insurance companies and funds apportion the
unreasonably high costs amongst consumers. By increasing the choice of
products and improving comparability, the costs for consumers will be
reduced significantly by the Pan-European pension product. Due to a
uniform European definition, consumers are more likely to use better
and cheaper products from other member states. The Pan-European pension thus promotes the integration of the capital markets union.

“I welcome that the European Insurance Supervision (EIOPA) takes the lead in supervision. Yet, the PEPP is, of course, no substitute for highly cost
effective models such as the public Swedish pension fund which has
helped Swedish citizens to profit from the capital markets with only
10% of the usual costs. The German Government should discard its objections to the Pan-European pension and support the proposal instead. The Greens in the European Parliament will strongly advocate for a decision to support the Commission proposal.”

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Category: A Frontpage, EU, European Parliament

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