PEPP in your step – Will the EU’s proposal for a pan-European personal pensions reinvigorate the CMU?

For years we have heard European pension systems are under strain, as a result of increases in life expectancy and declining birth rates.  Although many Member States have been reforming their pension systems to varying degrees to meet this challenge, the most recent financial and economic crisis had made the situation more difficult and more urgent. Higher unemployment, lower growth, higher national debt levels and financial market volatility render it all the more difficult for all parties  to deliver on pension promises.

Against this background, in 2010 the Commission launched a debate on whether and how the  pensions framework at EU level should be developed so as to ensure Member States (pensions, like taxes, were historically strictly a Member State competence) provide their citizens with adequate, sustainable and safe pensions – both now and in the future.

László Andor, former EU Commissioner for Employment, Social Affairs and Inclusion made the urgent need very clear at the 2010 launch of the Green Paper towards adequate, sustainable and safe European pension systems. At that time he said “The number of retired people in Europe compared to those financing their pensions is forecast to double by 2060 – the current situation is simply not sustainable. In addressing this challenge the balance between time spent in work and in retirement needs to be looked at carefully.”

Member States have traditionally pushed back against any action at EU level on pensions. However, things began to change in the 2010 Mario Monti Report on delivering a single market to consumers and citizens. Mr. Monti first introduced the idea for a regulatory framework for an EU-wide private pension regime. This made it into the Commission’s White Paper “An Agenda for Adequate, Safe and Sustainable Pensions” which was adopted in 2012 and called for the development of complementary private retirement schemes by encouraging social partners to develop such schemes, and encouraging Member States to optimise tax and other incentives.

The White Paper successfully argued that pensions are increasingly a matter of common concern in the EU – given the European market for personal pensions is fragmented and uneven, the offers are concentrated in a few Member States, while in some others they are nearly non-existent.

This patchwork of rules at EU and national levels impedes the development of a large and competitive EU-level market for personal pensions. In the Commission’s subsequent legislative proposal (which very closely followed EIOPA’s previous technical advice and input), a Pan European Pension Product (PEPP) will be available to all individuals who want to save for retirement.

The PEPP contains a default investment option for the majority of savers, under which the saver recovers at least the capital invested, and a limited number of alternative investment options. Fees and costs will be transparent, disclosed via a simple Key Information Document (KID) that will be supplied before the purchase, as well as a standardised benefits statement during the product lifetime.

Providers will be able to offer PEPPs on a pan-European basis, allowing savers to move across borders without the need to change product. Standardisation of core product features will be combined with flexibility to cater for national differences. PEPPs will also allow the possibility to switch providers periodically, every five years, at capped costs. This feature will allow transferability of the accumulated savings between EU Member States while maintaining the same contract. The PEPP Regulation will also facilitate access by allowing for online distribution and purchase of PEPPs.

According to the FT, asset managers and insurers will have access to more than 240 million retirement savers across the EU under this proposal. However, the fact that the default fund requires what looks like  a money backed guarantee (instead of the flexibility to offer different default investment strategies, including the life-cycle strategies) could mean that access to savers is in jeopardy for asset managers who do not offer guarantees because they prove to be hugely expensive for savers.

A press release issued by the European Fund and Asset Management Association (EFAMA – see here) -following the adoption of the proposal –  pointed out that asset managers should have the flexibility to suggest life-cycle strategies, as they offer long-term investment market exposure and risk diversification, while reducing the impact of market risk as the beneficiary approaches retirement. This argument might be difficult to square with the more socialist factions in the EU, who feel consumers need complete protection from market risk.

Then there is the thorny issue of tax. By the very nature of the product (and the importance of taxation in its attractiveness to consumers), ensuring an efficient and workable tax treatment across Member States is integral to the success of the PEPP.

Full harmonisation is unrealistic in this respect.  Existing taxation regimes for personal pensions differ significantly between jurisdictions and Member States would undoubtedly want to retain this within their competency. So alongside the proposal, the Commission recommended Member States  give PEPPs the same favourable tax treatment that governments provide their own national products, however this is merely a recommendation, and there is nothing requiring Member States to follow the Commission’s recommendation. The key is to find a solution which enables PEPP products to make the best use of taxation rules in each jurisdiction in order to minimise the impact of taxes upon the savings of consumers.