In June 2017 the EU Commission adopted a proposal for a Regulation of pan-European personal pension product (PEPP). As any other personal pension product PEPPs are intended to be long term investment products that complements state and workplace pensions and that consumers sign up for on voluntary basis. PEPP will be an addition to the existing markets for pensions, and will not replace or harmonize national personal pensions schemes. Given the recent attention to this Proposal, having just been approved by the Parliamentary Committee for Economic and Monetary Affairs (on 3 September 2018) we thought the proposal finally deserves to be commented on our blog. So what is special about PEPP and would it benefit consumers?
Who will offer PEPPs?
PEPPs may only be designed (manufactured) and sold (distributed) by EIOPA authorized firms in accordance with the conditions laid down in the proposed Regulation (Art. 4). PEPPs will be offered throughout the EU by various financial firms already established in Member States (Art. 5) that will offer PEPPs along with other products in their portfolio. Some will manufacture their own products (PEPP provider), others will act as intermediaries, sellers of products manufactured by other PEPP providers (PEPP distributor) (Art. 8).
What are the special features of PEPPs?
As part of the Capital Markets Union, PEPPs are intended to be a pan-European products. So the most important feature of PEPPs is their portability- consumers will be able to continue their contributions to their chosen PEPP even after moving their domicile to another Member States (Art. 12). Portability however is not as straight forward as it sounds at first. Given the very different national regimes across the EU especially the applicable tax incentives, PEPPs will operate as a series of national compartments, each compartment being compliant with national rules. A new compartment will be opened with every new PEPP account, that corresponds to the legal requirements and conditions for using tax incentives fixed at national level. The mechanism for opening new compartments, transferring the accumulated rights between these compartments and providing information about this option is laid down in the proposed Regulation.
Switching is the other important feature. PEPP consumers can switch providers once every five years at a capped cost of 1.5 % of the PEPP's positive balance (Arts 46-48)
Are PEPP investments safe?
The most important worry of with every investment is what will happen if the investment product does not perform as expected and what will happen if the provider goes bust. These questions are especially important with long term products as pensions, in which we might invest for years before we see any benefits of our investment, and on which we relay hugely as a source of income in times when we need it the most. The proposal provides for a Basic PEPP that protects at least the capital invested. This is however not the only version of the PEPP that consumers will be offered (the name of the proposal is misleading suggestions that there is only one PEPP product). Consumers will be offered up to five investment options, one of them being a default that protects at least the capital invested, from which consumers must choose. The investment choice can be changed free of charge once every five years (Arts. 34-36). Although the proposal provides for a guarantee of capital protection for the default investment option (Art. 37), this protection does not seem to extend to other versions of PEPP. Anyone opting for a more complex or risky PEPP will not be protected. It is also unclear what sort of guarantees are in place to protect the capital of basic PEPP.
As with every investment, the well-being of consumers is affected by the way their investments are managed. To this effect, the proposed Regulation contains basic rules on the type of acceptable investment for PEPP firms (Art. 33).
What other rules are included into the proposed Regulation?
Similarly to other European legislation, the provisions of the current proposal are heavily weighted in favor of information rules. Transparency is secured by electronic communication as the default (Art. 21). Prior to the conclusion of the contract, information is supplied on a PEPP key
information document (KID), setting out specified
standard information, building on existing rules in the Packaged Retail and
Insurance-based Investment Products (PRIIPs) Regulation. Importantly, KID will information
on past performance over at least five years, or the maximum available (Art. 23). There are special rules on PEPP advice (Art. 25) and information communicated during the contract (Art. 27), including the PEPP Benefit Statement giving specified
information on accrued entitlements or accumulated capital and any guarantees
applicable (Art. 28), and information on how to access supplementary information such as information on annual accounts and annual reports of PEPP providers (Art. 29)
The role for Member State regulation?
Although the PEPP product is intended to be a pan-European product, the proposed regulation only seems to lay down some basics for the creation and sale of products leaving a large space for Member states to vary especially in the design of products. Features related to the accumulation phase such as age limits, maximum amounts of contributions and early redemption rules (Art. 40), and those related to decumulation phase such as forms of pay-outs (Arts. 51-52) are left to the discretion of Member States.
What if something goes wrong?
The proposal obliges PEPP providers and distributors to have in place adequate and effective internal complaint handling schemes (Art. 43) and Member States to have adequate out of court, alternative dispute resolution procedures in place (Art. 44).
Final thoughts
The Proposal is currently in the legislative process. It has already received substantial amendments but may be subject to more before the final shape of the text. For example, it has now been clarified that the overall costs and fees should not exceed 1% of the accumulated capital per year. Better Finance has also achieved for the proposal to provide for a special provision of collective redress for PEPP consumers. However, significant concerns remain over crucial features of the product, for example over how the capital protection will work (see here).
On a more fundamental level, I find it hard to understand: how is the PEPP a pan-European product? Apart from the possibility of portability (which I am unclear how it would work in practice and whether consumer interests are truly protected), I don't see much efforts for the creation of a pan-European product, or a a financial product for that matter. Most of the features of the product are left to be regulated by Member States- a product cannot be created by information provision! Why is there not one or let's say three kinds of standardized PEPP (if we want to give choice to consumers) that are the same everywhere in their basic product features, that are reasonable priced and safe (with adequate capital protections), and that are offered by various providers throughout the EU?
