FECIF Advisory Committee Member
A PEPP saga update: pep or dud?
FECIF readers are now familiar with the European project to create a cross-border market for individual pension savings, the Pan-European Personal Pensions (PEPP) initiative.
Since this initiative first surfaced about three years ago, there has been remarkable consensus about how relevant and worthy it is, and very little practical results so far. Indeed, one could be forgiven for expressing a deep, sceptical sigh after the announcement at the end of February that the ECON committee of the European Parliament had agreed on the final version of the PEPP regulation, that can now proceed to the formal vote in plenary session.
So, what is the score on the PEPP? Is it making good progress towards creating a pan-European market for third-pillar pensions, helping Europeans build a nest egg for retirement and shoring up the Capital Market Union (CMU)? Or will it remain a list of good intentions, with no practical impact?
Recent progress on PEPP is very encouraging
FECIF and its pensions think-tank FEPI have been very supportive of the PEPP initiative from the very beginning, because we believe it lies at the heart of what matters to our clients, long-term financial security, and therefore at the heart of the mission of our members, helping and advising clients.
However, we also made it clear from the beginning that the PEPP would only succeed if it
covered the basics for a long-term investment product: taxation (attractive, clear and stable), product structure (simple and portable), choice of investment (default and more elaborate options), consumer information and advice.
The PEPP regulation voted recently in ECON committee has been hailed as a major step forward, and it has indeed made good progress on two of the essential topics flagged by FEPI: choice of investment and information & advice.
The investment profile for the ‘basic PEPP’, likely to be used by a large proportion of consumers, will be lifecycle-based. This is probably the best way to ensure a good balance between long-term performance and risk control, without imposing on consumers the high hidden costs of a permanent capital guarantee. We must ensure nonetheless that these investment profiles are monitored over time, and that they can be amended from time to time as circumstances evolve and new tools become available.
On information and advice, the progress has been spectacular. The initial draft from 2016 pretty much assumed that financial advice was an evil that had to be eradicated at all costs. The latest version seems to have realised that overloading clients with a deluge of confusing information without personalised advice was likely to end up in paralysis. The proposed regulation now expects advice to be given, except in the simplest of cases.
Many important points still missing
Regardless of the merits of the current PEPP regulation, it remains alarmingly silent on taxation. Although taxation is the single most important driver for the success of any savings product, this aspect has been ruled out of the PEPP. Obviously, taxation is a prerogative of the Member States, not the European Commission or European Parliament, and this is a sensitive point these days. However, FEPI and FECIF had made proposals to give the PEPP a clear tax advantage without requiring any change in local taxation. We still hope these can be revived, but until then this current proposal looks like a dud.
Product design is also a collateral victim of the tax debate. As no tax harmonization was attempted around the PEPP, the issue was swept under the carpet by creating national compartments within the PEPP to accommodate local tax rules. The likely impact, unfortunately, is that no consumer will go for a product that is just one more wrapper around an existing local product, and no provider will develop a cross-border product that requires the maintenance of local compartments, piling layers of complexity and cost.
As such, I believe that as long as these two issues are not tackled, PEPP will have no material impact on savers or providers. Instead, it will remain a theoretical construction, generating lots of talk in Brussels but no value to consumers.
It is for this reason that FECIF, and particularly FEPI, will continue to demonstrate the importance of these aspects to all relevant stakeholders and remind them of the ease and simplicity of our solution. The more people who work with and support that project, the more effective it will be. Success would mean significant business opportunities for insurance companies, investment houses and pension operations. Over to you!