Analytics, EU – Baltic States, Financial Services, Legislation, Modern EU, Pensioners

The reasoning behind the new Pan-European Personal Pension Product (called PEPP) is simple enough. Europe is facing an unprecedented demographic challenge: in 2060, for every retired person there will be only two people of working age, compared to four people presently. Social and welfare systems in the member states are already coming under pressure. Hence, the EU states urgently need to bridge the pension’s gap created by the ageing population. 

Introduction. The PEPP is one of the key measures announced in last month's Mid-term Review of the Capital Market Union, the Commission's project to create a single market for capital in the EU. The PEPP supports the goal of the CMU, which is to create the right conditions to unlock funding so that it can flow from Europe's savers to Europe's businesses.

Currently, only 27% of Europeans between 25 and 59 years old have enrolled themselves in a pension product. PEPP would contribute to unlocking this vast potential and boost investment in our economy.

Presently proposed Regulation builds on almost 600 contributions to the Commission’s public consultation on personal pensions in October 2016. Many respondents said the current supply of personal pension products in the EU was insufficient. It also took into account two reports from EIOPA in 2014 and 2016 and several external studies.

Alongside occupational pensions, personal pension plans are part of the solution to supplement state-based pensions. Presently only about a third Europeans save in some sort of private pension.

This is linked to the underdevelopment of the personal pensions market. In many EU states, supply is limited, and savers often face limited competition, hidden fees and expensive or no switching between providers. For those providers wishing to develop EU-wide products, a patchwork of rules stands in the way.

The new type of voluntary personal pension is designed to give savers more choice when they are putting money aside for old age and provide them with more competitive products.

PEPPs will have the same standard features wherever they are sold in the EU and can be offered by a broad range of providers, such as insurance companies, banks, occupational pension funds, investment firms and asset managers. They will complement existing state-based, occupational and national personal pensions, but not replace or harmonise national personal pension regimes. The new products will also ultimately bolster the Commission's plan for a Capital Markets Union by helping to channel more savings to long-term investments in the EU.

PEPP’s new features. PEPP would offer high-quality personal pensions to savers across the EU based on a single standard. PEPP will have several features inspired by existing pension products, e.g.:

·         It will be a simple product for savers, with only up to 5 investment strategies;

·         It will include a default, low-risk investment option, and strong rules on risk mitigation;

·         It will cap the costs of switching from one provider to another;

·         It will be a transparent product, with mandatory information on fees and investment; and

·         it will be flexible, offering the possibility to change investment strategy every 5 years and choosing how benefits are paid out.

All these features will be harmonised at EU level, and providers will only need one product authorisation to offer a PEPP across the EU. This highlights two further advantages of PEPP:

first, it would be portable – i.e. savers would be able to move their pension plan across national borders without switching provider. Many stand to benefit from this, such as mobile workers, students studying for a degree in another EU country, and those wanting to retire abroad.

And second, it is expected to achieve economies of scale and lower costs, which would make it an affordable product.

In many countries, tax incentives are a key driver for the take-up of personal pension products. This is why the Commission recommends the member states to grant the same tax treatment to the PEPP as to largely comparable national pension products. Hence, the states are invited to exchange best practices on the taxation of personal pensions, to promote a more consistent approach in the EU.

The success of the new Pan-European Personal Pension Product lies also is in perspective investments so much needed in European economy. By creating such an attractive long-term investment product, the Commission is hitting two targets: a) putting savings to long-term productive use, and b) providing future pensioners with critical revenue during their old age.

Source: Commission vice-president V. Dombrovskis speech, 29.06.2017, in:

 http://europa.eu/rapid/press-release_SPEECH-17-1841_en.htm?locale=en

Commission Vice-President, responsible for Financial Stability, Financial Services and Capital Markets Union, Valdis Dombrovskis underlined that the pan-European personal pension product was an important milestone towards completing the Capital Markets Union. It has enormous potential as it will offer savers across the EU more choice when putting money aside for retirement. It will drive competition by allowing more providers to offer this product outside their national markets. “It will work like a quality label and PEPP will also foster long-term investment in capital markets”, he added.

Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness said that “Pan-European personal pension products would act to promote competition amongst pension providers, granting consumers more choice of where to place their savings”. Completing the capital market union, he argued, would be also an important element of the Investment Plan for Europe. Thus, new proposal will also work to channel savings towards long-term investments, helping to upgrade infrastructure, boost growth and support jobs.

PEPP’s key benefits. Currently, the European market for personal pensions is fragmented and uneven. The offers are concentrated in a few EU member states, while in some others they are nearly non-existent. This variation in supply is linked to a patchwork of rules at EU and national levels, which impede development of a large and competitive EU-level market for personal pensions. The PEPP will allow consumers to voluntarily complement their savings for retirement, while benefitting from solid consumer protection.

Main benefits can be summarized in the following way:

·         PEPP savers will have more choice from a wide range of PEPP providers and benefit from greater competition.

·         Consumers will benefit from strong information requirements and distribution rules, also online. Providers will need to be authorised by the European Insurance and Occupational Pensions Authority (EIOPA) to provide the PEPP.

·         PEPP will grant savers a high level of consumer protection under a simple default investment option.

·         Savers will have the right to switch providers – both domestically and cross-border - at a capped cost every five years.

·         The PEPP will be portable between Member States, i.e. PEPP savers will be able to continue contributing to their PEPP when moving to another EU state. The regulatory framework that the Commission is proposing will create opportunities for a wide range of providers to be active on the personal pension market:

·         Providers will be able to develop PEPPs across several EU states, to pool assets more effectively and to achieve economies of scale.

·         PEPP providers will be able to reach out to consumers across the whole EU through electronic distribution channels.

·         PEPP providers and savers will have different options for payments at the end of the product's lifetime.

·         PEPP providers will benefit from an EU passport to facilitate cross-border distribution.

The proposal for the PEPP Regulation is accompanied by a Commission Recommendation on the tax treatment of personal pension products, including the PEPP. The Commission encourages EU states to grant the same tax treatment to PEPPs as is currently granted to similar existing national products, even if the PEPP does not fully match the national criteria for tax relief. EU states are also invited to exchange best practices on the taxation of their current personal pension products which should foster convergence of tax regimes.

The PEPP proposal will now be discussed by the European Parliament and the Council. Once adopted, the Regulation will enter into force 20 days after its publication in the Official Journal of the European Union.

More information on: = MEMO; = Factsheet; = DG FISMA website on Personal Pensions Products; = CMU Action Plan Mid-Term Review

http://europa.eu/rapid/press-release_IP-17-1800_en.htm?locale=en.

Latvian version: http://europa.eu/rapid/press-release_IP-17-1800_lv.htm