On August 14, the European Insurance and Occupational Pensions Authority (EIOPA) delivered to the European Commission a set of draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) along with its advice on delegated Acts to implement the framework for the design and delivery of the Pan-European Personal Pension Product (PEPP).
Regulation (EU) 2019/1238 (PEPP Regulation) came into force on August 14, 2019. The PEPP Regulation lays the foundation of a pan-EU market for personal pensions that is complementary to national pension schemes. The PEPP Regulation is designed to standardize the core product features, including transparency requirements and robust consumer protection rules, and provide detailed investment rules, consumers’ switching rights, along with the type of investment options. Crucially, the PEPP Regulation also allows some flexibility to enable different providers to tailor individual products to suit their business model. This is the first time that the Commission has introduced a financial product measure using a Regulation, and the instrument also forms part of the Commission's wider work on the Capital Markets Union (CMU).
Now that the RTS and ITS have been published, the PEPP Regulation is finally reaching the home stretch. This Client Alert analyses the key points of the consultation, puts the PEPP into its pan-European context and comments on the benefits and downsides of the proposed changes for consumers and financial service providers.
What is a PEPP?
The PEPP is a voluntary scheme that will sit alongside national pension schemes and offer a new pan-EU option for retirement savings. It is intended to offer consumers an additional option to save for retirement, complementing existing systems. It strives to be highly standardized to enable full comparability amongst PEPPs in order to provide relevant information to prospective PEPP savers. As such, the PEPP Regulation sets out uniform rules on the authorization, manufacturing, distribution and supervision of personal pension plans (PPPs) that are distributed in the EU under the designation PEPP by, what the EU hopes, will be a range of financial services firms, notably insurers and occupational funds and asset managers. Importantly for consumers but also for advancing the CMU’s aims, the PEPP regime allows savers to switch providers (domestically and cross-border) at a capped cost every five years, as well as to take their pension with them between Member States, i.e., a portability function that has long been an issue and barrier for many to save to begin with.
Key points arising as a result of the consultation
EIOPA carried out two public consultations on its proposals:
- On the draft Regulatory Technical Standards and the draft technical advice on Delegated Acts, from December 2, 2019, to March 2, 2020, which was accompanied by a public hearing on February 24, 2020; and
- On the draft Implementing Technical Standards from, March 20 to June 20, 2020 (the consultation period was extended by four weeks due to the COVID-19 pandemic).
The results of both consultations have now been published. The proposed instruments aim to include clear and enforceable quality criteria for PEPP to be followed by providers for the protection of consumers and ensuring high-quality, safe, transparent and simple PEPPs. EIOPA states it also tried in the meantime to leave room for innovation and competition in order to reach the best possible outcome. Whether clear criteria for robust investment strategies and risk mitigation have in fact been developed, remains to be seen. The following key points can be identified:
(1) Greater comparability of products
To facilitate transparency and comparability of PEPP products within the EU, EIOPA published two mandatory consumer information documents: the PEPP Key Information Document (PEPP KID) and the PEPP Benefit Statement. The aim of these documents is to provide, in a standardized manner, consumers with relevant information allowing for easier decision-making before entering into a binding contract and then, later on, also easier monitoring of the savings’ performance during the life of the contract.
(2) Cost efficiency
Cost efficiency is one of the major goals for the success of the PEPP. In case of the Basic PEPP, the plan is to limit the annual cost to 1% of the PEPP saver’s accumulated capital at the end of each year. According to EIOPA, the “Basic PEPP”, which is the core or default investment option, has been specifically regulated to offer a relatively high level of capital protection, which can be further extended to a capital guarantee. The idea is that the cost of providing that guarantee is excluded from the cost cap but must be expressly disclosed.
The benefits of such a scheme, should it be successful, are immeasurable from the perspective of consumers. The ability to invest in a secure, transferable pension product at such a low cost will no doubt entice many to participate. This, however, begs the question of whether such a scenario would be worth it from a PEPP provider point of view.
(3) Digital sales
With the insurance world moving further towards digitalization, online distribution is seen as one of the most important opportunities of PEPPs to attract consumers’ interest and to engage with the PEPP saver for retirement planning. It allows for easy access and use of information, given its digital format. The use of digital means is also expected to bring important cost efficiencies in the distribution process. A fully automated process, however, requires an initial capital injection in the form of building the appropriate infrastructure and ensuring reliable online support, which would not come at a small cost and which sadly seems to be neglected by EIOPA.
(4) Transparency for consumers
The PEPP consumer information documents introduce a 'summary risk indicator' in the PEPP KID, which identifies the riskiness of the different PEPP investment options. They also include comparative information to help consumers understand the relative risk to the expected future PEPP retirement benefits, as projections of future retirement income are key for consumers to assess whether the product meets their individual retirement objectives.
In this respect, the PEPP Framework is generally expected to build as much as possible on the application of Regulation (EU) No 1286/2014 (PRIIPs), while adapting the KID to the PEPP's retirement purpose to enable investors to select the most appropriate pension product. According to EIOPA, the specificities of PEPP products, in particular their long-term nature, means careful consideration is needed before directly importing PRIIPs approaches.
This has, however, not stopped a significant amount of content being borrowed from PRIIPs and imported into the KID. For example, national authorities will be responsible for authorizing PEPPs, and not EIOPA. EIOPA will instead be granted product intervention power with respect of the EU-level requirement placed on PEPP providers, which is set out in the delegated acts and based on the wording of the PRIIPS Regulation. It remains to be seen whether national competent authorities are actually good ambassadors for a pan-European approach.
(5) Portability of the product
It comes as no surprise that the success of PEPP will depend on strong supervision and close cooperation between national competent authorities in the different Member States. EIOPA is of the opinion that regular supervisory reporting and solid product intervention powers will be necessary to ensure efficient and effective supervision and monitoring of the PEPP market, both at national and European levels. An analysis of this point here would be incomplete without examining the parallel with Directive (EU) 2016/2341(IORPs), which regulates the activities and supervision of institutions for occupational retirement provision.
Similarly to the PEPP, the aim of the IOPRs is to facilitate worker mobility, with the emphasis here being placed on workers, while ensuring a high level of protection and security for members and beneficiaries of occupational pension schemes. It should be remembered, however, that the IORPs is a directive, and expressly includes in its recital the aim of achieving a minimum level of harmonization, while the PEPP is a regulation and as such, much more adept at guaranteeing a level playing field.
Tax was never high on the priority list at the inception of PEPP; it might even be said that it was not expressly mentioned when the product was being set up. The presidency successfully resisted any requirements for Member States to offer tax incentives for PEPP savers in the PEPP Regulation (on the grounds that tax incentives are exclusively a matter for member states and as such the Regulation’s compromise text refers to "possible" incentives allowing a member state to offer incentives if they wish. As such, the PEPP Regulation does not contain any specific tax provisions. The sub-accounts feature of the PEPP will enable savers to qualify for national tax incentives if they exist, provided they comply with the corresponding national tax requirements for incentives.
Moreover, the RTS and ITS also do not mention tax expressly except in one of the annexes, which dictates that “[u]nder the title ‘What can I expect at retirement?’, the PEPP provider shall present a statement that the tax law of the PEPP saver’s Member State of residence may have an impact on the actual pay-out”. Member States are encouraged to grant the same tax treatment to PEPPs as to comparable national PPPs, so as to create a level playing field for the PEPP; however no express push has been made for that in the most recent legislative instruments either.
Outlook and next steps
The PEPP Regulation is undoubtedly made with consumers’ interests in mind but it also offers the opportunity to develop this novel product (and possibly many others) to a level not seen before in the pan-European insurance market. The RTS and ITS are a step in that direction, however they also open the floor for financial service providers to more discussions on what the best way to go forward is. As the PEPP is about to reach its finish line, the product development of pan-European product providers is likely to face a boost.
If you would like to discuss strategic options, in particular, how the PEPP Regulation may affect your business as well as present opportunities for you or your clients more generally, please contact our Eurozone Hub key contacts.
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