PEPP: strict requirements are supposed to ensure transparency and security
While we provided a general overview of the Pan-European Personal Pension Product (PEPP) in the previous blog article, the following article focuses on the regulations. This is because PEPP is a highly regulated product. Potential providers have to comply with extensive information obligations, among other things.
The Europe-wide private pension product PEPP (Pan-European Personal Pension Product) is subject to strict requirements. ‘These requirements aim to give savers a greater choice and offer them competitive private pension solutions that also meet a high standard of consumer protection,’ says the European Commission’s PEPP website. The PEPP Regulation of 25 July 2019 provides the legal basis for the creation of a pan-European private pension market in which the core elements of the product are standardised, such as transparency requirements, investment requirements, switching providers and the type of investment options.
BaFin checks PEPP at national level
In Germany, the German Federal Financial Supervisory Authority (BaFin) prescribes the rules for PEPP, while at European level, the European Insurance and Occupational Pensions Authority (EIOPA) is responsible. More specifically, BaFin checks whether the PEPP intended for the German market meets the statutory requirements both during registration and during ongoing operations.
Companies wishing to offer PEPP have to apply to BaFin for approval of the product. Once the application has been approved, the PEPP is listed in a central register. This central register is maintained by EIOPA and is open to the public. The EU authority also coordinates the work of national supervisory authorities and monitors developments throughout the EU market. Both BaFin and EIOPA have the possibility to intervene in the event of violations. They can, for example, withdraw a provider’s approval for a PEPP product or prohibit its distribution.
Insurance companies have to consider IDD sales guidelines
Advice on PEPP matters is a must: according to the relevant EU regulation, PEPP products may only be sold after consultation, including individual product recommendations. The recommended product has to meet the client’s wishes and needs with regard to their pension. This is intended to ensure that the customer has all the necessary information before deciding to purchase a PEPP. In addition, advice is planned shortly before retirement in order to choose the best form of payment for the individual.
In the sales and consulting process, potential providers have to comply with the relevant regulations of the respective industry. This means that insurance companies and insurance brokers are subject to the provisions of the Insurance Distribution Directive (IDD); securities dealers, banks and other PEPP providers are subject to the second EU Markets in Financial Instruments Directive (MiFID II).
KID and Benefit Statement
The information obligations for PEPP include two standardised documents developed by EIOPA: the PEPP Key Information Document (KID) and the PEPP Benefit Statement.
The Key Information Document is intended to present all key product features and the chosen investment option transparently and comprehensibly in order to make it easier for the client to make a decision before concluding an agreement.
The KID basic information sheet should contain, among other things, the following key information:
- Long-term objectives of the chosen product,
- Description of which risk classes the client prefers,
- Description of possible forms of payment,
- Summary Risk Indicator,
- Risk-benefit overview.
Distinguish between particularly suitable and less suitable investment strategies
The classification of the risk-benefit profiles and the overall risk indicator should explain the risks to achieving an adequate and stable pension income in a comprehensible way. This is stated in the Official Journal of the European Union of 22 March 2021.
The overall risk indicator is intended to make risks and therefore also PEPP products comparable and enable clients to distinguish suitable investment strategies and risk-mitigation techniques from less suitable ones. This metric should enable the client to see whether a riskier investment actually has the potential to deliver higher returns.
Customer should be able to monitor the performance of the PEPP product themselves
The PEPP Benefit Statement must be provided to the client once a year. It shows the customer in a simple and clear way how their savings activities are developing. Among other things, the Benefit Statement must clearly and comprehensibly present the costs and forecasts of future pension income and premium payments.
These two documents allow the client to monitor the performance themselves and check whether the product meets the individual pension targets. Providers should also provide this information digitally, as online sales are seen as the central sales channel.
Special regulation for switching providers
In addition to the costs for the Basic PEPP, the switch to another PEPP provider is also strictly regulated: Customers may switch providers at the earliest five years after the conclusion of the PEPP contract. The costs that may be charged for the changeover service are limited to 0.5 per cent of the previous premium amount.
Some potential providers may shy away from the strict requirements imposed by regulators. But: PEPP also offers providers opportunities and advantages. Find out more in our next article on PEPP: ‘A billion-euro market is opening up for PEPP providers.’