EIOPA is currently consulting on the creation of a standardised Pan-European Personal Pension Product (PEPP). This is the latest of a series of reforms proposed by European institutions to promote retirement savings, investment in European markets and to enable cross-border pensions provision.
The European Insurance and Occupational Pensions Authority (EIOPA) is currently consulting on the creation of a standardised Pan-European Personal Pension Product (PEPP). EIOPA’s main concern is whether there would be any benefits in introducing a new legal framework, distinct from that currently in place for personal pension schemes or products (PPPs).
This is the latest of a series of reforms proposed by European institutions to promote retirement savings, investment in European markets and to enable cross-border pensions provision.
In particular, EIOPA and the European Commission have previously consulted on an EU single market for personal pensions and the consumer protection in PPPs.1 These earlier reviews have focused on two alternatives: developing common rules by way of a Directive to enable cross-border activity in the PPP market, or developing a 2nd regime in the form of a Regulation. The new proposals reflect the priorities of this earlier analysis, setting out high standards for consumer protection that would apply to PEPPs and the options for facilitating cross-border activity.
EIOPA proposes that PEPPs be highly regulated and standardised products. It considers that they should be subject to strict consumer protection requirements, promoting high levels of disclosure, minimal costs and low risk. One significant issue will be whether PEPPs can be developed which will allow consumers to benefit from the tax reliefs available for retirement products in different Member States.
A new regime could benefit both providers (by expanding the potential market for a standardised PPP across the European working population) and individuals (if standardisation introduced new safe and cost-effective products to the market). It could also appeal to international employers, by facilitating mobile working practices among their existing employees and helping them to attract new workers from other jurisdictions. This approach could be particularly useful in jurisdictions where both occupational pensions and PPPs are underdeveloped.
This briefing sets out a summary of the EIOPA proposals, the key characteristics proposed for PEPPs and the regulatory regime to which they would be subject and the implications of this for providers, individual consumers and employers.
Aims of the reforms
The broad aims of EIOPA’s proposals are to:
- encourage more EU citizens to save for retirement by enhancing the options available for retirement provision, particularly where existing provision for occupational pensions is weak;
- promoting consumer protection, by improving quality of products and the disclosure of information by providers to individuals (e.g. by promoting transparency and comparability of PEPPs); and
- enabling cross-border activity and labour mobility, and thereby furthering the Internal Market.
EIOPA proposes two main strategies to meet these aims:
- developing a regulatory regime tailored for products with an “explicit retirement purpose”, which is distinct from that applicable to regular financial products – e.g. rules concerning the investment strategy relating to these products should reflect their long term nature; and
- creating a harmonised legal framework, which offers a level playing field for providers.
What will a PEPP be like?
EIOPA views standardisation as key to protecting consumers of PEPPs. PEPP providers would be subject to basic rules regulating their authorisation, supervision, structure and activities. The PEPP authorisation regime would recognise where providers are subject to an existing European licensing regime (e.g. Solvency II or the IORP directive). It would also designate the authorities responsible for authorisation and supervision, particularly in cross-border situations. Providers of PEPPs would need to demonstrate that they were sufficiently safe and soundly managed to reassure consumers of their ability to meet long term commitments – e.g. though maintaining sufficient ongoing financial resources. PEPPs themselves would be subject to the following requirements:
- A “product passport” based on a one-stop shop in the Home Member State incorporating a system of registration/ notification and co-operation between competent authorities to allow for easy marketing in the Host Member States.
- Investment rules for the product, adhering to principles such as security, quality, liquidity (taking their long-term profile into account), return and diversification.
- Ability to be marketed through modern distribution channels (such as the internet), without additional advice.
- Product characteristics and disclosure requirements which secure high levels of consumer protection without relying on the provision of additional advice.
- Product oversight and governance principles applying to the process of designing, marketing and monitoring PEPPs.
EIOPA considers that the core characteristics of PEPPs should focus on the safety of consumers and the ease with which they can make investment choices. The authority sets out five principle features with this goal in mind:
- Simple: does not require the holder to make complex choices (e.g. having a limited number of investment options),
- Transparent: clarity about the investment options and how they will work over time, with the default containing an investment strategy based on a life-cycling with de-risking approach, unless the default option contains a guarantee,
- Cost effective: aims to balance the objective of maximising returns at a defined level of risk, and the need to keep costs as low as possible,
- Trustworthy: information about the product is clearly disclosed, it is sold in the best interests of the customer, and the product and its providers and distributors are well regulated and supervised,
- Well governed: subject to appropriate product oversight and governance.
There would continue to be some discrepancy between PEPPs based on the rules operating in their country of origin. For instance, EIOPA currently envisages that certain features of PEPPS would continue to be determined at a national level – e.g. the decumulation options available to consumers. EIOPA further considers that PEPPs would have certain flexible elements (e.g. different retirement ages or ways of being accessed, such as lump-sums or deferred annuities) in order to benefit from favourable tax treatment in certain Member States. National regimes often require retirement products to have very specific characteristics to benefit from tax reliefs. Providers may find it difficult to develop PEPPs which are eligible for reliefs in more than one Member State, and are therefore marketable across multiple jurisdictions.
How will a new regime affect…
EIOPA proposes that those providers that are already subject to existing EU financial services legislation (such as the Solvency II, MiFID, UCITS, CRD IV and IORP Directives) may be able to show that they meet the requirements for provision of PEPPs through “some sort of “equivalence assessment””. However, in order to open the market to new providers and ensure a “level playing field”, the authority is also in favour of having an additional stand-alone regime apply to all PEPP providers. As the predominant providers of PPPs, insurers are likely to be best placed to take advantage of any equivalence assessment. It is highly unlikely that any providers of occupational pensions will seek to participate in a market where they would be subject to equivalent solvency requirements to insurers. Given the high degree of standardisation proposed, certain providers may be reluctant to compete in a market where there may be little scope to differentiate themselves from their competitors. (EIOPA suggests that providers will primarily compete through differing investment strategies, within the framework of certain high level investment policy principles.) Others may be attracted to the prospect of cross-border sales and a larger potential market. The size of the potential market will ultimately depend upon whether PEPPs can be developed which benefit from tax reliefs available across different jurisdictions.
Cross-border workers, in particular, could benefit from the offer of equivalent pension provision throughout EU Member States. Additionally, EIOPA hopes that enough providers would be attracted by the new regime that consumers face a greater choice between providers. They are consulting on the extent to which the long-term, potentially illiquid nature of pensions savings is compatible with providing consumers with the ability to switch between providers without incurring additional charges. However, the focus on standardisation and consumer protection could limit the range of products available to consumers.
International employers, particularly those operating in jurisdictions where both occupational pensions and PPPs are underdeveloped, could benefit from additional ways to remunerate their cross-border workers and attract potential recruits from overseas. EIOPA envisages that certain employers may wish to become providers of PEPPs themselves, where they currently offer occupational pension schemes. However, given the additional regulatory burden this would involve, it is more likely that the new regime would affect those already relying on third party providers to offer pension products to their employees.
The impact of a new framework for PEPPs upon supervisors would depend upon the method adopted for harmonising rules across Member States. EIOPA is consulting upon two possible options:
- Passporting based on current legal frameworks for PPPs.
- Introducing a 2nd regime through Regulations, which would establish a new EU-wide framework (which could exist in parallel to national PPP laws).
EIOPA has proposed that host Member States would offer a “one-stop shop” for the registration and notification of PEPP product passports. This would require co-operation between national authorities.
EIOPA’s consultation closes on 5 October 2015 and the authority intends to deliver its advice to European Commission in early 2016.