A] Prelude *
* For more information about EU pensions and pension systems, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/europe-expat-pensions
https://expatpensionholland.nl/global-pillars-systems
B] The New Approach
The European Insurance and Occupational Pensions Authority (EIOPA) published a Staff Paper on the future of the Pan-European Pension Product (PEPP). We appreciate this action as the PEPP is a great initiative but it was just not working from a practical client focused perspective.
The paper sets out the reasons behind the limited uptake of the PEPP and suggests improvements to its design to overcome supply-side, demand-side and structural barriers hindering its broader adoption.
EU citizens collectively hold around €34 trillion in savings, yet around a third of these funds are held in bank deposits. At the same time, aging populations across the EU are increasing the strain on state pensions. With ever fewer workers supporting a growing number of retirees, Member States face the major challenge of continuing to provide adequate retirement income while maintaining robust public finances.
The Pan-European Pension Product (PEPP), launched in 2022, was designed to offer a simple, transparent, cost-efficient and mobile retirement savings option with which European citizens could supplement their state pensions. A well-functioning PEPP market can help reduce Europe’s pension gaps, provide citizens with adequate and sustainable retirement income and supply vital capital to finance the long-term growth of the EU’s real economy, as well as the green and digital transitions.
Still, due to various supply-side, demand-related and structural reasons, its uptake has been limited, warranting re-assessment. In the Paper, EIOPA takes stock of why PEPP has not lived up to its potential and proposes enhancements that could breathe new life into supplementary pensions across the EU.
From a practical side we have always said that as the amount of tax benefit was not determined and could differ substantially per country, that made the PEPP almost for sure a no go for clients (and advisers) who focus on standard excellent net return.
C] Supply-side difficulties
Launching any new product involves upfront investment and the PEPP’s costs and fees cap of 1% of the accumulated capital per year mean that the product requires scale to become a viable commercial proposition.
While EIOPA does not consider that a 1% cost cap is too low per se, the need for scale may be setting the bar fairly high for smaller product providers. Potential providers may also be concerned about “cannibalizing” their existing product proposition with the launch of a PEPP.
D] Demand factors and other obstacles
Overall low awareness and low participation in supplementary pension schemes in Europe along with the current cost-of-living crisis have likely dampened consumers’ demand for the PEPP. Even as inflation recedes and the economic environment improves, it remains uncertain whether consumers would show significantly more interest for PEPP in its current form.
Delays in PEPP's implementation by some Member States and especially the lack of a uniform tax treatment at the national level have also severely limited adoption.
E] How to fix limitations
EIOPA is convinced that the PEPP’s core characteristics – simplicity, cost-efficiency, transparency mobility and flexibility – should remain the foundation for an updated version. That said, improvements are possible to make PEPP more attractive to providers and savers alike.
I. To tackle supply-side issues, the potential market for PEPP must be expanded significantly. The below measures are proposals to achieving this:
- Combine occupational and personal PEPP into a single product. Allowing tax-efficient employer contributions with personal contributions within one PEPP would provide the necessary scale to attract more providers.
- Focus on value-for-money considerations in PEPP instead of a hard ceiling on costs.
- Create PEPP labels for national products that adhere to a set of EU-wide common rules.
- Reduce the administrative burden by making national sub-accounts voluntary, thereby making the cross-border feature of PEPP optional.
- Allow the transfers of funds from other personal pension products into the PEPP.
II. Possible demand-side fixes should aim at encouraging pension participation in general. Leveraging all three pillars of pensions (state, occupational and personal) is necessary to secure citizens’ financial freedom in retirement and changing the status quo calls for bold proposals:
- Introduce auto-enrolment for a personal pension scheme like the PEPP at the EU level. Automatically opening a scheme for every EU citizen reaching the age of 18 or entering the workforce would be an innovative step. Such schemes should allow both regular and intermittent contributions to reflect diverse career paths.
- Develop pension tracking systems. Providing savers with transparent and accessible information on their combined pension entitlements in one single place supports long-term savings and adequate pension planning.
III. Beyond these measures, national and Union-wide initiatives are indispensable to making a revised PEPP a success. Member States should:
- Grant PEPP the same favorable tax treatment that national personal pension products enjoy. Additionally, EU-wide tax harmonization for PEPP would facilitate cross-border sales and help providers reach economies of scale and keep costs low.
- Implement pension dashboards to improve transparency regarding the adequacy and sustainability of national pension systems. Measuring pension gaps is an essential first step to closing them.
EIOPA strongly believes that European citizens, PEPP providers and Member States stand to benefit greatly from a revised PEPP, from having a low-cost, long-term savings alternative that can deepen the EU’s capital markets and ease the pressure on state finances.
EIOPA looks forward to engaging in discussions with stakeholders on the above proposals and to developing specific policy proposals ahead of the scheduled evaluation of the PEPP Regulation in 2027.
F] Finally
We appreciate the initiative from EIOPA to keep trying to make the PEPP a real option.
The EU (like China/USA/UK/Australia/India) does need more pension coverage. Looking at the content of the paper, which talks about auto-enrollment and combining Pillar 2+3 pensions, we feel that this paper is a first not very practical step toward a maybe once active PEPP.
We do applaud the stance on auto-enrollment on EU level. Even if the basic amount would be very modest, it would be a great first step. (Auto enrollment appears to be very effective in other regions like for example in The UK.)
Our advice: For result ‘think back’ from client perspective. Start with what works, which means tax benefits have to be clear as step 1.
For the complete paper feel free to visit: