Despite some last-minute political tweaks, the Pan-European Personal Pension Product (PEPP) has the potential to do for pensions what UCITS has done for long-term investment. agreed an online panel assembled by Luxembourg For Finance. But patience is required.
The delegated regulation on PEPP was published in the EU official journal five weeks ago, and is set to come into force from 22 March 2022. It has been something of a brainchild of the European asset management industry, with Luxembourg fund players working to drive it forward over the last decade. By giving pension providers the chance to pool investments from multiple jurisdictions, the expectation is that this would drive down costs and increase choice for people planning their retirement. It would also be useful for people who work in multiple countries during their careers.
What excites the profession in particular is its ability to use so called ‘life cycling strategies’. Martin Parkes, Managing Director of Global Public Policy at Blackrock, explained: ‘This sees the portfolio automatically adapt to an individual’s life circumstances. It can start off with a high equity allocation, and then the risk evolves slowly over time, yet without the individual having to go through substantial rounds of expensive discussions on reallocation.’ He added that notions such as ‘suitability’ embedded in many EU directives are also catered for directly. Moreover the asset manager has a wide range of freedom about which strategy to adopt.
Desire and need
Another advantage is the product can provide more than guaranteed return pensions, which have been the staple in much of Europe for decades. There are rules around the requirement to provide advice to clients, as well as making disclosure documents available, which the panel said would be more flexible than the UCITS and PRIIPs equivalents. Also the way benefits on retirement can be drawn down is varied: with savers able to receive a lump sum, to buy an annuity, or to remain invested and take an income.
As well as the asset management industry wanting it to work, there is also a major political imperative to diffuse the pension timebomb. ‘Close to 20% of European citizens are at risk of poverty or social exclusion in older age,’ warned Fausto Parente, Executive Director of the European Insurance and Occupational Pensions Authority (EIOPA) who opened the Focus On Pensions event, held on 22 April.
Fee cap hiccup
However just as the industry was gearing up to start working with the text, the European Parliament decided at the last minute on the need for a maximum level of fees for all PEPPs, not just basic, low risk products. The fee cap has been set at 1% of assets. ‘Mandatory personal advice providers will have to review not only the financial objectives, but the profile of each potential subscriber,’ said Christian Lemaire Global Head of Retirement Solutions, Amundi.
He said this would involve multiple discussions, ‘advice which will translate into costs that we estimate, on average, will be much higher than this 1% fee.’ He went on: ‘it’s a big issue, because if we cannot find a viable business model, you can imagine that most providers will keep on selling local pension products. This will be very counter-productive so is a big concern.’
Long term
Tax is the other perennial problem with creating pan-European pension policies, as some member states tax subscriptions, while others tax income. Yet Parkes believes the PEPP has sufficient flexibility to negotiate these challenges over the long term. ‘This is something that the Luxembourg industry has focused on for many years, such as with how UCITS have been distributed around Europe with different tax treatments,’ he said.
Parkes insisted judging the success of this innovation was not a question of whether PEPPs start popping up across Europe in the next couple of years. He drew a comparison with the European long-term investment fund (ELTIF) which is only now starting to gain traction despite these being around for five years. ‘We’re still doing a lot of work in local markets educating the distributors, that’s after we took time to understand what we would do with the product,’ said Parkes. He foresees a similar process for the PEPP, adding that financial capability and literacy at member state level will also be key to this process.
More transparency
On this latter point Parente had mentioned earlier how EIOPA is working on initiatives designed to give greater transparency to the condition of the pensions market in each county. The first is a ‘pension dashboard’ designed to monitor the pension situation in different member states. Then there is a pension tracking tool which would give individuals clear information on what retirement income they can expect. ‘The topic of pensions is not so popular,’ he said.
‘Nobody wants to hear that they will have to wait longer to receive a pension or that they might not receive adequate income for their retirement,’ he added. If these home truths can be understood by savers, then the long term future of the PEPP would be golden.