A billion-euro market is opening up for PEPP providers
The European pension PEPP and the associated regulations were described in previous blog posts. Potential PEPP providers face significant regulatory hurdles. The good news is that the effort can be worth it.
With the Pan-European Personal Pension Product (PEPP), the EU has introduced a cross-border and highly standardised pension product. PEPP can be distributed throughout the EU and savers can easily take it to another EU country. Despite extensive requirements, the pension solution also offers numerous opportunities for providers.
Promising market with high demand
A highly promising market is opening up for potential providers: the 27 EU member states have about 450 million inhabitants. In 2017, only 27 per cent of EU citizens aged between 25 and 59 had a private pension. This is the result of a fact sheet ‘Frequently asked questions about PEPP’ on the EU Commission’s website, which was published in June 2017. Potential providers thus benefit from a ‘true single market for PEPPs’ with easier cross-border distribution. A single approval from the European supervisory authority EIOPA is sufficient to offer the product in all EU countries.
PEPP could double EU private pension market growth
If you decide to offer PEPP in several countries, you can not only conquer new markets, but also acquire new customer groups. The pension solution is open to all EU citizens with legal capacity – regardless of whether they are students, unemployed persons, employees or self-employed persons. This sets PEPP apart from other subsidised pension products such as the Riester pensions. The self-employed, for example, can only benefit to a limited extent from the state Riester subsidies.
All of this has strong growth potential, as confirmed by a study by the management consultancy Ernst & Young (EY) commissioned by the EU Commission in 2017. According to this, ‘PEPPs have the potential to double the growth of the private pension market.’ For example, analysts at EY estimate that PEPP will increase the assets held by providers of private pension products to €2.1 trillion in 2030. Without PEPP, it would only be €1.4 trillion. However, there is one limitation: this potential can only be realised if all member states provide tax incentives for the European pension product.
Low distribution costs thanks to online sales
The EU sees online distribution, including automated and semi-automated consulting, as a key sales channel for PEPP to ensure cost-effective distribution.
Lower distribution costs also give providers greater leeway to comply with the 1 per cent cost cap provided for in the Basic PEPP. In addition, smaller and medium-sized providers in particular can implement internationalisation strategies cost-effectively due to lower distribution costs. This gives them the opportunity to increase their competitiveness. This is particularly true regarding the major players that already have international sales structures in place. In addition, online sales providers have the opportunity to address online-savvy, younger and people who are mobile throughout the EU in particular.
Digital approach and communication with customers also open up cross-selling and upselling potential for insurance companies for further products from their product range – beyond PEPP.
Lower barriers to entry thanks to PEPP
A cross-border pension provision means that the barriers for providers to enter new EU markets are significantly lower than in the past. Especially given the fact that pension markets in Europe are very diverse and regulated.
With PEPP, providers can also market their products in countries where private, statutory or company pension provision is less widespread, such as south-eastern Europe. There is likely to be a high demand for a simple, secure and affordable pension solution due to a lack of alternatives. This once again highlights the potential of PEPP to gain new customer groups and tap into new EU markets.
Investment options full of opportunities promise high margins
According to the PEPP Regulation, up to five other product variants with different risk-reward profiles may be offered in addition to the standard version, the Basic PEPP. Unlike the Basic PEPP, these other investment options do not require cost caps or capital guarantees.
Without a strict guarantee obligation, providers can pursue more promising investment strategies, such as a higher equity component. This allows the development of higher-yield PEPPs that can generate higher margins in times of low interest rates.
There are great opportunities for providers. But there is also criticism of the European pension. In the next blog article, you will find out exactly what PEPP does not like and what challenges need to be overcome.