With Brexit ongoing and the political upheaval both in the UK and in Europe, it is a good time for an update on the Pan-European Personal Pension product (PEPP).
The background to this is both simple and at first glance sensible.
Although occupational pensions regulation for EU member states is based on the current IORP directive (and the soon to follow IORP 2), this only provides a broad framework on issues such as funding defined benefit pension schemes and regulation. Each country in the European Union has its own contract-based personal pension system and they vary greatly in size, public engagement and complexity. (And safe to say that for complexity, the UK's system is hard to beat.)
Although there are some provisions dealing with cross-border pension schemes, overall, the differences between each nation's system can be viewed as a barrier to workers moving between member states. After all, they can end up with pots of money scattered across a variety of tax jurisdictions with limited ability to consolidate and those small pots of money are not the most efficient way to funnel pensions savings into investments – that in turn (in theory) should allow European businesses access to capital to improve their competitiveness as part of the capital markets union.
That is where the PEPP is intended to come in.
The initial proposals came out of a consultation paper from the European Commission and the central idea is to set up a parallel EU-regulated personal pension system via EU Regulation. The Regulation would set up a parallel legal structure set at EU level that would allow savers across the EU to pay money into their PEPP wherever they might be.
In the longer term, this would then push national jurisdictions towards harmonisation and better regulation where this did not already exist. More saving means more capital which, in turn, means better European companies and happier retirees.
The PEPP has a number of proposed features, most of which are rather familiar to a UK pensions lawyer:
a key information document and information provision for savers including projected pension returns to retirement;
a sensible default investment where a saver does not pick a specific set of investment options;
financial guarantees or clear de-risking in the default fund as a saver approaches retirement to help safeguard expected return;
caps on costs and charges;
a transfers regime to allow mobility between different products; and
a variety of options for the payout at the end.
Of course, for the UK this runs into a couple of quite obvious issues:
subject to the fact this is an EU portable product (by design) it adds precisely nothing to what we already have; and
adding an extra layer of EU level regulation to what is (as noted above) a complicated and developed pension market is hardly going to make things easier.
We then have the obvious timing issues around Brexit and the linked issues relating to tax harmonisation. Pensions are a tax-privileged savings option, the expected harmonisation of national regimes created by the PEPP would be complex given that they would directly impact on taxation in the relevant member states.
That is not to say that the PEPP does not have some benefits, the mobility element of it would be useful for transnational workers. It would add a new way of saving for those member states who have less developed personal pension systems. The capital markets arguments are sensible. It is just difficult to see what benefit there is to member states with existing developed personal pension markets.
The PEPP is currently going through its EU legislative processes with the negotiations between the EU Parliament and the Commission publishing its second compromise proposal on 11 June 2018 and, for those interested in EU pensions proposals, it is available here.
We look forward to seeing how this product develops and will update further as it progresses.