EU plans €700bn cross-border personal pension product

The prospect of a pan-European Union pension product has moved a step closer with the publication today of a European Commission proposal for a cross-border product structure.

The proposed Pan-European Personal Pension Product (PEPP) is designed to promote private pension saving across the EU, particularly in countries where personal pension provision is low.

Research for the EC Commission says the PEPP has the potential to double the growth of the personal pension market so that by 2030, personal pension providers will hold €2.1trn of assets with PEPP in place, compared to just €1.4trn without the PEPP, from €700bn today. This growth assumes that the PEPP receives favourable tax treatment in all member states.

To qualify as a PEPP a lower-risk default investment option that must offer a capital protection option that must ensure that the saver recoups at least the original capital invested. Transfers will be allowed every five years, with a maximum penalty of 1.5 per cent of fund value, considerably in excess of the zero transfer costs of UK stakeholder pension or qualifying workplace pension products, which can be transferred as often as the policyholder chooses.

PEPP providers will be required to offer a default investment option with some capital protection and will have to limit the number of investment options for to a maximum of five ‘to facilitate savers’ choice’.

There are no specific mandatory investment requirements as long as providers respect the prudent person principle that assets shall be invested in the best long term interests of consumers, shall be predominantly invested on regulated markets and in derivative instruments only in as far if this is beneficial to efficient portfolio management.

The proposed new product will be overseen by the European Insurance and Occupational Pensions Authority (EIOPA), with national authorities responsible for overseeing PEPP providers.

The proposal will now be discussed by the European Parliament and the Council. If adopted, the new rules will enter into force 20 days after its publication in the Official Journal of the European Union. The EU expects providers to be able to offer products two years after regulations take effect.

To overcome differences between tax regimes in nation states the EC wants member states to grant the same tax treatment to PEPPs as they grant to similar existing national personal pension products, even if the PEPP does not match all national criteria for tax relief. The EC is also asking member states that already have more than one type of personal pension to give PEPPs the most favourable tax treatment available to their PPPs.

The EC is not harmonising tax treatment of personal pension products: it says the taxation will remain dependent on the domicile of the PEPP saver. But if PEPP providers want to offer PEPPs that qualify for tax relief in a member state, they can tailor a national compartment for that Member State in such a way that it fulfils all national criteria to get tax relief. The national treatment principle guarantees that the PEPP saver paying contributions to that national compartment gets the same tax treatment as when he paid contributions to the comparable national personal pension product.

The EC says new products are needed because 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. Today, only 27 per cent of Europeans between 25 and 59 years old have enrolled themselves in a personal pension product, mainly in a few EU countries.

It believes the PEPP regime will provide the building blocks for the creation of a voluntary single personal pension product that can be marketed by providers on a pan-European scale and says it has received expressions of interest from multiple pensions providers. It says the PEPP will lead to a broader offer of personal pension products in the EU.

EU pensions body PensionsEurope chair Janwillem Bouma says: “PensionsEurope promotes good pensions for the people in Europe in all different shapes and forms. Even considering the bulk of the retirement income is and will continue to be provided by social security pensions and workplace pensions, we believe that voluntary personal pensions are particularly needed and useful for those who don’t have access to workplace pensions, as self-employed and workers in new forms of employment, or where personal pensions offered are not reliable or attractive. At the same time PensionsEurope calls for the European Commission to promote occupational pension systems and to favor the exchange of best practice between countries.”

William Nott, president of EFAMA, the European investment management trade assocition, says: “The PEPP will bring much needed scale, choice and competition to the EU personal pensions market. I am also confident that the portability of the PEPP will make pension savings more attractive to younger people with increasingly mobile careers and lifestyles. By channelling more capital towards long-term investments and putting European savings to better use, the PEPP can become the figurehead of the CMU project. EFAMA looks forward to continuing to engage and offer support to policymakers, to contribute to a successful PEPP.”