Private provisions with PEPP – unlimited
For years, the EU has been discussing, tinkering and crafting – and now the time has come: the EU has created the legal basis for Europe-wide private pensions. Initial products may be available as early as March 2022. In the following articles, we take a closer look at PEPP, look at the requirements surrounding the European pension and, above all, at the opportunities that will open up for PEPP providers.
Cross-border pensions in Europe – EU authorities have been working on the idea since 2015. In spring 2019, the EU Parliament and the Council of the European Union finally agreed on a pan-European pension product: the Pan-European Personal Pension Product (PEPP). The PEPP Regulation of 25 July 2019 created the legal basis and defined the regulatory technical standards through the publication of Delegated Regulation 2021/1473. This is the final piece of legislation required to develop PEPP products. The regulatory technical standards were developed by the European insurance supervisory authority EIOPA.
First European-wide pension products already available from March 2022
The private pension product should be able to be marketed throughout Europe, but be subject to strict licensing regulations. The voluntary pension scheme is intended to complement the existing state, statutory and company schemes. Potential providers include insurance companies, company pension funds, banks, asset managers, investment firms and administrators of alternative investment funds.
A one-year transitional period will come into force with the publication of Delegate Regulation 2021/1473. This gives insurance companies and other potential providers sufficient time to deal with the relevant requirements and design suitable products. The first products could be launched in the EU as early as March 2022.
PEPP as a safe companion in Europe
The main feature of the new pension solution is that it is easy to take the product with you to another EU member state and continue it. This way, PEPP takes account of one development in particular: studying in Germany, working in France, Poland or Austria, and finally retiring in Spain – no longer an unusual path for people’s lives to take. On the contrary, mobility in Europe is increasing. More and more people are working across borders and pursuing careers across the EU: According to the Federal Statistical Office, a total of 6.4 million EU citizens worked in another EU country in 2020 without having the nationality of that country. This represents an increase of almost 40 per cent compared to 2011.
PEPP as a further building block to avoid impending shortfalls
PEPP is also intended to be a further component of pensions in order to cushion the effects of increasing life expectancy. This is because demographic change is placing an increasing burden on statutory pension systems throughout Europe. Life expectancy from birth has increased by about ten years in the 27 EU Member States over the past five decades. This is according to an EU report on the impact of demographic change of 17 June 2020. At the same time, the working-age population is shrinking and birth rates are falling. PEPP is intended to help close the impending shortfall in old age and increase retirement income.
Extensive information obligations relating to PEPP
According to the European Commission, PEPP aims to give EU citizens greater choice in their pensions and to give them more competitive products to choose from. This is according to a fact sheet issued by the European Commission on 4 April 2019. PEPP aims to create a pan-European market for pensions, where products ‘should provide adequate consumer protection while providing a framework that is flexible enough to allow different providers to develop products that fit their respective business models.’ The new pension solution should be open to every European, regardless of age or occupation.
In view of these requirements, EU authorities attach particular importance to ensuring that the product is affordable, simple, safe and transparent. This is why PEPP is also subject to strict regulation. In order to ensure full transparency, EIOPA has developed comprehensive information obligations. This includes, among others, two binding customer information documents, the KID (Key Information Document – to be presented upon conclusion of the contract) and the PEPP Benefit Statement (annual overview of the customer’s savings activities).
Premium guarantee in the basic version
Potential providers have different options for designing the product. The core element is the so-called Basic PEPP. The standard version is primarily aimed at consumers who want a secure private pension product. In the case of Basic PEPP, providers have to ensure that the client recovers their capital. This can be achieved through an annual premium guarantee, risk-mitigation techniques or a conservative or low-risk investment strategy. The guidelines for the five other investment options, which may have a different risk-reward profile, are somewhat less strict. What all options have in common is that adequate customer protection is ensured through the use of guarantees or risk-mitigation techniques.
The basic product also includes a cost cap: for example, the costs and fees to be paid per year may not exceed 1 per cent of the previously saved capital.
Several variants are permitted for the distribution of capital, such as a continuous annuity or a one-off payment. In addition, consumers may switch providers no earlier than five years after the conclusion of the PEPP contract, with limited costs for switching. In order to keep the European pension as affordable as possible, PEPP was designed as a digital product. This also means that online sales are seen as the main sales channel.
Funding still pending in Germany
Each EU member state can decide for itself whether and how PEPP is generally tax-funded. In Germany, the Federal Ministry of Finance has not yet made a decision on this. A PEPP subsidy would be conceivable if the product meets the same requirements as for other subsidised pension products such as Riester or Rürup pensions.
PEPP has many advantages for customers
In addition to being able to be taken to other EU countries, PEPP also offers consumers several other advantages: the pension product, which is harmonised across the EU, expands the range of private pension solutions and is relatively inexpensive compared to other offers. In addition, the simple product concept offers a very high level of transparency in terms of costs, fees and risks. Thanks to the premium guarantee in the basic version, it is also attractive for customers with a strong need for security. The investment options available in addition to the Basic PEPP do not provide for a premium guarantee, which means that higher returns can be achieved through more promising investments.
What are the detailed regulatory requirements for PEPP, what does KID have to include and what is the risk indicator all about? We will deal with these questions in the next article: ‘PEPP: strict requirements are supposed to ensure transparency and security.’