PEPP: can it save Europe’s pension problems?

in Industry Insights, 14.12.2015

Fact: People are not saving enough for their pensions.

Fact: The pension gap, i.e. the difference between the pension people are expecting to receive and what they’ll actually get, is currently €1.9 trillion.[1]

Fact: More and more of the general population are inactive, and retirees are living longer (see a few statistics here)—meaning that the situation is only going to get worse.

So… what to do? In response to these problems, Europe is hoping to release the Pan-European Personal Pension product (a.k.a. “PEPP”), a standardised pension product that will be usable in all EU member states. It’s a Pillar 3 initiative that suggests a move, within pensions, towards more personal savings. From a larger view, it also suggests that the time to retire the pension may be fast approaching, as it’s clear that the shift from a state pension to increased personal (and workplace) savings schemes is inevitable.

Save money, save the economy

If young people start saving early, it will not only be less painful for them down the road, but it could also benefit the whole economy. The Capital Market Union initiative hopes to harness the power of this saved money by adapting regulation so as to redirect the flow of pension savings towards financing long-term projects such as schools, hospitals, and innovative SMEs—instead of having that money sleep, unused, in bank accounts. It proposes to do so by providing certain incentives. The overall effect would be to create jobs in Europe, allow for more satisfactory investment returns, improve pension pots, and ensure that the beneficial cycle of pension funds—i.e. from employee to economy and back again—will continue.

Put some PEPP in your step

The PEPP legislation’s aim is not to harmonise every existing type of personal pension across Europe. Instead, the idea is to create an EU-wide personal pension product that can be offered to EU citizens in addition to the products that are already available at the national level.

The creation of such a product would benefit EU consumers in a variety of ways. PEPPs could be sold across borders, which would increase competition between personal pension product providers by creating a level playing field between insurers, asset managers, and pension funds, thereby enhancing consumer choice and reducing costs. Furthermore, mobile citizens could keep saving in the same product when they move from one EU country to another. High standards of consumer protection would associate the PEPP with a recognised, high-quality EU label, similar to the UCITS brand. All these points would encourage more European citizens to save for an adequate retirement income.

Effective communication, alongside unification of cross-border personal pension products, will be integral to the success of PEPPs. There will be a real need to educate citizens, in particular the young generation who have less to invest but a greater need to save. It is imperative that people have an idea of how much they will receive from the state pension, from their employers, and from their individual savings (amongst other PEPPs).

Fact file

PEPP wants to be a cross-border pension product with very realistic and enticing characteristics, the main features of which are:

Transparent: tax neutrality, clarity about the investment options, defaulted clauses based on life-cycle

Simple: limited investment choice to avoid confusion

Cost-effective: maximised returns at a defined level of risk

Cross-border: mobility and comparison between EU countries made easier

Safe for consumers: consumer interests put first via regulation


A huge opportunity for pension funds and asset managers

Such a well-designed product could be a good answer to the question of how to close the EU pension gap.

Currently, insurers dominate national personal pension product markets; however, if publication of the EIOPA’s advice convinces the EU Commission to propose the creation of a PEPP, it will offer asset managers and pension funds huge opportunities to move into that market.

[1] Financial Times, January 2013

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