The PEPP will be a voluntary scheme for saving for retirement. The intention is that it will be offered by a broad range of financial companies across the EU and will be available to savers as a complement to public and occupational pension systems, and alongside existing national private pension schemes.
The Commission says that the framework set out in the PEPP Regulation aims to ensure a sufficient level of consumer protection with regard to the essential features of the product, while being flexible enough to allow different providers to tailor products to suit their business model and to use different forms of distribution, including online. The Regulation does not affect existing EU occupational pension legislation, such as the “IORPD”.
The proposed PEPP requirements cover authorisation, distribution (including information and advice), investment policy, switching provider, and cross-border provision and portability. It is suggested that the introduction of an EU legislative framework will reduce providers’ costs by creating greater economies of scale, particularly in relation to administration and investment as it would allow them to centralise some functions at EU level. It is further suggested that the PEPP framework would result in assets under management in the EU personal pensions market growing from EUR 0.7 trillion to EUR 2.1 trillion by 2030, versus only EUR 1.4 trillion without it.
Only financial undertakings already authorised at EU level under applicable sectorial legislation will be eligible to apply to EIOPA (the sole authorisation body) to act as a PEPP provider. Existing personal pension products could convert to being a PEPP or remain as national vehicles. PEPPs can be distributed by financial institutions other than those authorised to be PEPP providers.
The mechanism behind the portability concept envisages opening a new compartment within each individual PEPP account for the different Member States to which the PEPP saver moves over time and the ability to transfer accumulated rights between compartments. These compartments would provide for the different national tax incentives. The accompanying recommendation on the tax treatment of personal pensions is intended to encourage Member States to modify their tax provisions so that any pension tax incentives be expanded to cover the PEPP even if it does not meet all the existing national criteria for tax relief.
PEPP savers will be offered up to five investment options (one being a default investment option that ensure that the saver recoups at least the capital invested) and will be able to change their selection free of charge once every five years. Switching provide will also be possible and the cost of switching will be capped. Pre-contractual information will be provided in the form of a key information document (which will have many similarities with the PRIIP KID) and savers will also receive periodic “PEPP Benefit Statements”.
Where savers fully bear investment risk, a depositary must be appointed, which will safeguard the assets and have oversight duties and liabilities. PEPP providers can offer cover for risk of death and other biometric risks, if they wish.
Delegated acts are envisaged in the areas of conflicts of interest, inducements, selling PEPPs with and without advice, product oversight and governance, provision of information, investment options and reporting to national authorities. A review of the operation of the Regulation is proposed after 5 years.
The proposal is at the start of its legislative journey. The European Parliament and the Council will now – separately and then in trialogue with the Commission – debate the provisions and propose amendments. Given that this initiative falls under the Capital Markets Union banner, there will be political will to progress the initiative as soon as possible, but there is much detail to debate and the key question of national tax incentives lies outside the Commission’s remit. It is important that the industry fully engages in the debate and the details in order to ensure the final framework is operable and attractive to both providers and savers.