The existing pension fund market set-up in Europe is facing a huge test, as a result of enormous demographic change brought about by falling birth rates and a rapidly ageing population. Estimates suggest, for example, that people aged 65 and over will account for 29.1 per cent of the EU’s population by 2080, compared to 19.2 per cent in 2016.1
Ensuring the growing pool of retirees receive sufficient income will be a challenge through the existing occupational and state-based pension fund model, although the EU has recognised that personal pensions will play a major role in addressing this problem.2
Despite efforts to harmonise rules and regulations across the Single Market, there are member state divergences and fragmentation in a number of areas, including around the provision of personal pensions and the extent of their funding.
This patchwork of inconsistent regulation makes it difficult for personal pension providers to distribute cross-border, resulting in limited competition, higher prices and an inability to port personal pensions across member states.3 In some cases, member states may not even offer personal pension products to their populace.4
The European Commission (EC) has said just 27 per cent of the 243 million Europeans aged between 25 and 59 years old have enrolled themselves in a pension product, and they live mainly in a handful of countries (Belgium, the Czech Republic, the Netherlands, Spain and the UK).5 Redressing this savings gap is now an EU-wide area of focus.
Stimulating the personal pension product market in Europe
Reform is currently happening under the banner of the Capital Markets Union (CMU), an initiative driving integration of Europe’s capital markets in order to attract increased investment. In June 2017, the EC published a proposal outlining its plans to create a Pan-European Personal Pension Product (PEPP) in what it hopes will accentuate saver choice.
This standardised voluntary personal pension will provide savers with a wide range of products made available by insurance companies, banks, occupational pension funds, investment firms and asset managers.6 “They will complement existing state-based, occupational and national personal pensions but not replace or harmonise national personal pension regimes,” read the EC’s press release.7 It added the PEPP should receive similarly favourable taxation treatment to existing national products to stimulate interest8 while deflating the risk of taxation arbitrage across member states.
The EC hopes the PEPP will unlock significant amounts of capital which could be invested in long-term instruments and European enterprises,9 a core CMU objective. A report produced by consultancy EY for the EC said personal pension product Assets under Management (AuM) stood at EUR0.7 trillion in 2017, and estimated this could increase to EUR2.1 trillion with the PEPP by 2030 as opposed to EUR1.4 trillion without the PEPP.10
The rules governing the PEPP
To distribute a PEPP cross-border, a provider will need to be approved by the European Insurance and Occupational Pensions Authority (EIOPA). “Providers will be able to develop PEPPs across several member states to pool assets more effectively and to achieve economies of scale,” said the EC press release.11 In recognition that consumer buying habits are evolving through mass adoption of smartphones, tablets and applications, the EC said that PEPPs can be distributed through online or electronic channels.
For buyers of PEPPs, there are several advantages, according to the EC, namely simpler portability across member states. In other words, a saver will be permitted to contribute to their PEPP even if they migrate to another EU country. Savers can also change PEPP provider every five years at a fixed cost.12 The European Fund and Asset Management Association (EFAMA) said the portability of the PEPP would make pension saving more amenable to younger people with mobile careers.13
In terms of investor protections, EU regulators have routinely encouraged transparency, as evidenced by the disclosure obligations demanded under the Markets in Financial Instruments Directive II (MiFID II) and the Key Information Document (KID) supplied by managers regulated under UCITS and the Packaged Retail and Insurance Linked Products Regulation (PRIIPs). The PEPP is no different, and providers must supply a KID,14 a standardised, concise and abridged disclosure document containing information on a financial product.
The next steps for the PEPP
The proposal now faces scrutiny from the European Parliament and the European Council, but some experts have acknowledged PEPPs could face some stumbling blocks. The EU is very diverse in terms of taxation, pensions, demographics, wages and cultures, and creating a standardised personal pension scheme will undoubtedly be a challenge.15
There is also speculation as to what will happen following Brexit. Reports suggest that UK PEPP providers, assuming they are domiciled in the EU or have a substantive EU subsidiary that is authorised by the EIOPA, should be able to continue distributing once the country formally leaves the bloc.16 However, the same Financial Times article also quoted an EC spokesperson stating the ability of UK savers hoping to buy into PEPPs would be unclear until Brexit is concluded. As ever, no regulation or regulator is an island, so the success of PEPP will depend on the political and financial environment as much as the intentions of legislators in Brussels and London.
1 Eurostat – Population Structure and Ageing
2 Insurance Europe – A Pan-European Personal Pension Product
5 Fact sheet – A Pan-European Personal Pension Product
13 EFAMA press release – EFAMA welcomes the Commission’s legislative proposal on the pan-European Personal Pension Product
14 KPMG Fund News – EU Commission’s proposal on PEPP: a European brand for pension products
15 Financial Times – EU unveils plans for pan-EU pension
16 Financial Times – EU unveils plans for pan-EU pension