It is estimated that only around 28% of the EU’s 243 million citizens aged 25 to 59 years are currently saving into a pension. The European Commission considers that offering an alternative form of pensions vehicle will drive a change in behaviour. To this end, on 29 June, the European Commission proposed Regulations setting out a framework for a bold new pan-European personal pension product (PEPP). This emerges as part of the EU’s 2015 Action Plan on Building a Capital Markets Union (CMU) and is expected to grow the personal pension market to €2.1 trillion by 2030. The Regulations will now be considered by the European Parliament and the European Council with PEPPs expected to start appearing in the market some two years after the Regulations come into effect.
Brexit – In or Out?
The UK’s imminent exit from the EU leaves some uncertainty about the impact that PEPPs will have on the UK pensions market and on capital flows. The Commission has indicated that those UK PEPP providers that have established themselves or a subsidiary in the EU27 prior to Brexit, and gained authorisation as PEPP providers, will be able to offer the product after the UK’s exit from the EU. However, precisely how the regime will work in practice, for example, in relation to porting a PEPP into or out of the UK, is not yet clear and will depend on the detailed outcome of Brexit negotiations.
The Commission is progressing with its project to create a new EU-wide regulatory framework that will enable personal pension products to be offered across Member States. The proposed Regulations build on one of several options presented in the Commission’s paper, which was consulted on from July to October 2016. Under this model, an EU-wide “voluntary 2nd regime” will be introduced in parallel to existing national personal pension regimes. This means PEPPs will not replace existing national pension structures, but will instead take the form of supplemental personal pension schemes, which will be offered by a broad range of providers, including insurers, occupational pension funds, investment firms, asset managers and banks. The consultation paper notes insurance companies currently manage approximately 90% of personal pension assets. Significantly, PEPPs will be available for distribution and purchase online across all Member States.
Pension products are considered by the Commission to offer long-term investment and growth opportunities in capital markets, as barriers to the flow of funds between Member States are removed under a single pensions markets. As an element of the CMU Plan, the free flow of capital is intended to boost business investment and infrastructure projects resulting in job creation across the EU. The ability of providers to pool their assets under the new regime is additionally expected to lead to greater economies of scale and lower costs for those providers and increased competition as new providers enter the pensions market.
The Commission envisages the increase in choice, product simplicity, lower prices and improved performance offered by PEPPs will encourage retirement planning by those not currently saving – only 67 million of approximately 243 million EU citizens aged 25 to 59 years currently have a personal pension. PEPPs may also be used to supplement existing individual pension arrangements and, as a complementary product, will allow contributions during retirement. The Commission believes these are likely to appeal to mobile citizens and self-employed individuals, but also to those currently unemployed, young savers and students. Additionally, it is hoped PEPPs will create retirement options in those Member States where these are currently scarce and relieve some of the financial pressure on the state. It observes that differing regulatory regimes are presently discouraging providers from seeking new business opportunities abroad.
The PEPP framework will permit providers flexibility in designing pension products subject to retaining certain standardised product features aimed at offering protection to consumers. Key product features, with varying degrees of flexibility within them, will include the following:
- Providers must be authorised by the European Insurance and Occupational Pensions Authority (EIOPA) and will be entered into a central register, while national authorities will continue to supervise providers. EIOPA will monitor the market and national supervisory regimes with a view to achieving convergence.
- Providers must observe transparency in costs and fees and meet other disclosure requirements in the form of a Key Information Document (before a contract is entered) and provide standardised periodic benefits statements.
- PEPPs will offer up to five savings options with a default low-risk investment option with a limited guarantee ensuring recovery of the capital investment. Consumers can waive the advice requirement in relation to the latter subject to providers enquiring as to the knowledge and experience of the saver.
- Individuals will have the right to switch providers domestically and cross-border every five years at a capped cost.
- Providers may invest in a range of options subject to the “prudent person” principle and the best long-term interest of the saver.
- PEPPs will allow continued contributions where members move between Member States and allow the transfer of accumulated assets without liquidation.
- A range of pay-out options will be available.
- User-friendly complaint and dispute resolution procedures must be provided.
Prior to publishing the proposed Regulations, the Commission also considered an EY feasibility study on a European personal pensions framework in the context of the CMU dated June 2016, commissioned by the Directorate-General (DG) for Financial Stability, Financial Services and Capital Markets Union (FISMA). Amongst other things, this examined the implementation of PEPPs, as well as the tax treatment of personal pensions across Member States and applicable domestic social and labour law requirements. The Commission is of the view that a favourable tax environment for PEPPs is essential to the competitiveness and appeal of this new product. As a result, it has issued a Recommendation that Member States offer PEPPs the same tax treatment as comparable domestic products, or the most favourable treatment where different personal pension plans are taxed differently, even where the PEPP does not meet national tax relief criteria. It also encourages Member States to share best practice with a view to fostering the convergence of tax regimes in the area.