PEPP: what is it?
After a public consultation and several months of work, the European Commission released the long-waited proposal on Pan-European Personal Pension Product (PEPP) last week. This new kind of voluntary personal pension is designed to give savers more choice when they are putting money aside for old age and provide them with more competitive, safe and transparent products.
With this Pan-European Pension Plan, savers will have access to a broader range of providers (insurance companies, occupational pension funds, investment firms and asset managers). The products offered should be cheaper since providers will compete in a bigger market. Those pension plans will hopefully go a long way towards closing the pensions gap and complement the state-based pension systems rather than replacing or harmonizing national personal pension regimes.
A PEPP would make more capital available for long-term investments in the real economy.
Tax treatment: the ever-present sensitive issue
In its proposal released last week, the Commission recommends that “Member States grant the same tax treatment to this product as to similar existing national products to ensure that the PEPP gets off to a flying start”.
The German Investment Association has warned that these tax issues could be a “massive obstacle” for the PEPP.
In order to encourage Member States to grant tax relief on PEPP, a recommendation on the Tax Treatment of Personal Pension products was adopted along with the proposal. The Commission encourages Member States “to grant PEPPs provided under ( proposed) Regulation the same tax relief as the one granted to national PPPs, once these PEPPs are launched on the personal pension market, even in those cases where the PEPPs product features do not match all the national criteria required by the Member State to grant tax relief to PPPs. Where Member States have more than one type of PPP, they are encouraged to give PEPPs the most favorable tax treatment available to their PPPs”.
Indeed, tax incentives are important factors when a saver considers subscribing to a personal pension product (PPP) and tax incentives on PPPs differ between Member States. In some countries PPPs are subject to tax-relief whereas in others, a PPP is not subject to tax if the provider is subject to tax (but in that case, he can deduct the contributions to the pensions reserve from the tax base).
According to the Commission, the national treatment principle should apply to PEPP savers. The EC based its recommendation on the free movements of persons, services and capital (articles 21,45, 49, 56 and 63 TFEU) and on the jurisprudence of the Court of Justice of the EU (De Groot, C-385/00): “it should be possible for a PEPP that is objectively comparable to a PPP marketed in a given Member State to benefit from the same tax relief granted to the PPP in that Member State. This also applies if the PEPP is provided by a provider from another Member State”.
Everyone knows though that tax treatment remains a sensitive issue for Member States and it is reasonable to assume that not all Member States will apply the same tax treatment, which could then lead to some kind of “forum shopping”. The German Investment Association, while welcoming the proposal, warned that this tax treatment issue could lead to a “patchwork approach in Europe”.
Read the Funds Europe article here
Consult the European Commission Proposal for a PEPP here
Consult the European Commission Recommendation on the tax treatment of personal pension products, including the pan-European Personal Pension Product here