Overcoming PEPP challenges – cost-effectively and efficiently
With the introduction of the European pension PEPP, the EU has created a voluntary cross-border pension solution designed to complement existing pension products in a contemporary way. The European pension creates numerous opportunities, but implementation poses a number of challenges for providers and their IT systems. Below is an overview of the challenges and criticisms as well as possible solutions.
Cost cap for Basic PEPP
In particular, the cost cap provided for in the Basic PEPP, which must not exceed one per cent of annual contributions, has been criticised. The German Insurance Association (GDV) considers the cost cap to be too low, according to a position paper dated 12 December 2019. However, the Basic PEPP, which must be offered by every provider, is only one of six product variants. The other five variants are subject to much less stringent requirements and allow for a completely different cost structure. With a modern management system, insurance companies can take advantage of this flexibility and bring more profitable PEPP products to market in addition to the Basic PEPP.
Online sales as a central sales channel
PEPP is a complex product, mainly due to the regulatory framework and the different investment options. According to the wishes of the EU authorities, online distribution is to be the central sales channel for European pensions. Experts doubt, however, that purely online sales will suffice. ‘Whether a fundamentally consulting-intensive topic such as pensions can be sold entirely online is questionable,’ said Michael Hoppstädter, Managing Director of the consulting company Longial, in a press release dated 19 April 2021. He does not see traditional sales via banks, insurance representatives and brokers working with PEPP. Hoppstädter fears that this is hardly feasible with the planned cost cap.
This makes it even more important for potential providers to expand and improve their digital sales channels. With optimally designed online sales combined with a modern management system, the cost cap of one per cent for Basic PEPP can also be met. Efficient online sales are also urgently needed in view of new competitors. The traditional pension providers are competing with insurtechs, fintechs and asset managers, who are also allowed to offer the new European pension and whose digital business models are already much more advanced.
Premium guarantee for Basic PEPP
Another challenge is the premium guarantee provided for in the Basic PEPP. With this standard variant, providers have to ensure that the customer recovers their capital. This can be achieved, for example, by means of an annual premium guarantee (hard guarantee). In this case, capital preservation is ensured by a low-risk investment strategy.
However, in view of persistently low interest rates, premium guarantees are difficult to implement in pensions. Under the current conditions, a gross premium guarantee is increasingly difficult to present, according to a result report published in February 2021 by the German Association of Actuaries (DAV) on guarantees for company pension schemes in the low-interest environment.
To achieve better service outcomes than guarantees in comparison, PEPP allows other types of risk-mitigation techniques, such as life-cycle models. Here, higher-yield investments are possible at the beginning of the savings phase; later, the capital has to be reallocated to secure investments. With a flexible software solution that supports a fast, automated reallocation of capital, such models can be implemented in a highly efficient manner.
Theme: Incentives. Customer demand for PEPP will strongly depend on the extent to which the products receive tax incentives. The EU leaves it to the individual member states whether and how they want to promote European pensions. This means that a key success factor for PEPP lies in the hands of the individual member states.
In Germany, a final decision on tax incentives has not yet been made. However, funding should in principle be possible if the PEPP product meets the same requirements as for other subsidised pension products. This is the Federal Ministry of Finance currently puts it.
Since pensions are regulated differently in the individual EU countries, potential providers are faced with the task of mapping the country-specific regulations and funding opportunities in their systems. However, by outsourcing these tasks to a specialist service provider, the various requirements can be implemented in a way that saves resources. The advantage is that PEPP providers are not obliged to enter a European pension in all or more EU countries at the same time. Instead, they can proceed gradually and first offer the European pension in the countries where they already have other products. According to the PEPP regulations, they have to offer a PEPP product in another EU country within three years.
Overcoming challenges with a standard solution
IT plays a key role in successfully overcoming these challenges. There are two main arguments in favour of using standard software: cost and time. Administrative costs can be significantly reduced with the help of an appropriately designed software solution with a high degree of automation. The external service provider can take over the implementation of regulatory requirements and tax incentives. This reduces the pressure on internal resources and creates the freedom to concentrate on topics relevant to the competition. Users are always up to date and do not have to worry about which legal or regulatory changes need to be implemented. This creates security of investment and cost advantages, as the costs of development and necessary adaptations are shared by numerous users.
Insurance companies should deal intensively with the topic of PEPP. Whether the product range is to be expanded in the future to include the European pension is a strategic decision. Those who incorporate PEPP into their product range face some challenges, but at the same time, they have excellent opportunities to internationalise and gain new markets and customer groups. There is not yet a cross-border pension product, but there are many young people in Europe who are highly mobile for work and who are likely to be very interested in a European pension.
The use of a modern standard solution gives providers the room for manoeuvre to exploit this potential. msg life is aware of this and is closely monitoring the further developments of PEPP on the part of legislators and on the international markets.