PEPP: a cross-border product with domestic issues
The Pan-European Pension Product (PEPP) was born of the widespread view that life insurance yields are down, that the replacement rate is dropping in mandatory retirement regimes, and that retirement savings products are still developing unevenly. “PEPP would help mobilise this vast potential and stimulate investments in the EU economy”, the European Commission said, pointing out that only 27% of Europeans aged 25 to 59 years have subscribed to a retirement savings product. The Commission ultimately hopes that AuM of providers of retirement savings products will reach €2,100bn in 2030 if PEPP is set up, vs. just €1,400bn otherwise.
This new European individual product came to life in a text approved on 13 February. As it is transferable from one country to another every five years, it must deal with unequal systems. “Retirement savings is still a very domestic issue. So, it is important that this regulatory framework be able to adjust to each countries’ special features”, said Laure Delahousse, deputy managing director of the French Financial Management Association (AFG). However, Brussels denies that it is aiming to create a miracle product. “This framework will not replace individual retirement systems that already exist at the national level. Nor will it harmonise them”, the European Commission said.
All providers (including pension funds, insurers, and asset managers) will also be placed on a level playing field and subject to transferability. “All PEPPs will have a ‘secured investment option’ offering the saver a high level of protection. This could take the form of a capital guarantee for insurers or a conservative investment strategy for asset managers”, said Nicolas Jeanmart, head of personal insurance, general insurance and macroeconomics at Insurance Europe. Even so, such secured strategies “will be subject to different supervisory and regulatory frameworks, which could lead to very different results”.
However, these common rules will have to be flexible. “Asset managers must have the necessary leeway to invest earmarked retirement savings in illiquid asset classes for diversification reasons”, said Laure Delahousse, who suggested that “asset managers be free to compose the best asset allocation for offering their clients the best possible returns”.
But are these adjustments a sign that PEPP is having trouble taking off? While asset managers see it as a bonanza (in France, they distribute supplemental savings only through the PERCO and PEE products), Dutch pension funds have already made it known that they are not very inclined to offer the product. The same goes for the Germans and some insurance companies: “Life insurance companies fear that PEPP will cannibalise their own market, as is already the case in Germany”, said Bruno Gabellieri, secretary-general of the European Association of Paritarian Institutions. PEPP may well turn out to be a disappointment: “PEPP’s potential market may be in central Europe”, Gabellieri said.
It is now up to the member-states and regulators to take the text on board via level 2 measures. “For the European Insurance and Occupational Pensions Authority (EIOPA) this will be a crucial year in determining the product’s contours and addressing persistent issues”, Jeanmart said.
In France, the PACTE law should be decisive. Lawmakers do intend to model the new PERP on the basis of PEPP rules regarding decumulation and taxation. “Level 2 measures will have to be carefully designed on two points in particular: disclosures to beneficiaries and the main principles of risk management that will be used in the default option”, says Laure Delahousse, hopeful that a repetition of the “errors” of the PRIIPS KID can be avoided.
The timing on transpositions should mean an entry into force by 2021.