Something new on the personal pensions front? 2024 might enter history books as the year in which the European Union (EU) finally decided to offer its citizens a competitive personal pension product and its firms a steady source of long-term funding. Over the past twelve months, three high-level reports on the EU’s economy advocated plugging EU citizens’ retail savings to EU firms’ investment needs through via pan-European long-term investment plans.1 The long-awaited “Capital Markets Union” (CMU) —or more fitly, “Savings and Investments Union”(SIU)— has the potential to put Europe back on the road to prosperity, at the same time unlocking innovation in the economy and addressing the pensions time bomb. These discussions on the SIU triggered renewed discussions on the Pan-European Personal Pension, including in a staff paper that the European Insurance and Occupational Pensions Authority (EIOPA) published on 11 September 2024.
A strong supporter of the PEPP project from its inception, BETTER FINANCE, the European Federation of Investors and Financial Services Users, shares EIOPA disappointment at the slow take-up of the product on the European market. BETTER FINANCE also shares most of EIOPA’s diagnosis of the reasons for this development: delayed implementation by Member States, discriminatory tax treatment compared to existing national-only products, excessive complexity of the product, small potential target market, lack of pension awareness among the general public, but also, reluctance of potential providers to introduce a lower-cost alternative to the wide array of expensive and underperforming personal pension products that biased “advisors” keep pushing to their clients.
Where the financial industry would blame the cap on cost and charges (the “1% fee cap”, which only applies to the default “basic” option) for the lack of interest from product providers, EIOPA rightly remarks that providers of similar products in other jurisdictions seem perfectly able to market their products with lower fees. EIOPA instead points to the limited size of the PEPP’s target market as a more convincing explanation: small market means little economies of scale, seemingly making the 1% fee cap difficult (though not impossible) to comply with. EIOPA then suggests various ways in which the target market for PEPP may be expanded.
BETTER FINANCE advocates for retaining the 1% fee cap and adjusting the PEPP features to expand the target market instead of yielding to the calls of the financial industry to lift the fee cap. From the retail investors’ perspective, the latter is unacceptable: it would make the PEPP yet another expensive personal pension product in a market that is already crowded with such products. The former, by contrast, offers a much welcome outlook: make the PEPP the simple, low-cost pension product that meets the needs of most pension savers and finally introduces competition on a market that has for too long worked for the detriment of consumers. This requires (a) the full commitment of the Member States to grant the PEPP the same tax treatment as that granted to their most incentivised personal pension product; (b) a simplification of the PEPP features, which could usefully draw inspiration from the half-century old and highly successful US Individual Retirement Account (IRA). The PEPP constitutes a possible answer to European leaders’ call for a successful pan-European long-term pension plan. If EU policy-makers are serious about improving the competitiveness of the EU and to better allocate households’ savings to the real economy, they must give a second chance to the PEPP.
⬇️Read BETTER FINANCE position on PEPP⬇️