Member of Fecif Advisory Committee
The PEPP saga: what does it mean for advisors?
Anyone interested in the future of pensions should welcome the European initiative on the Pan European Personal Pension products (PEPP). Retirement provision is a major issue facing all European countries, hit by a combination of increasing life expectancy and lowering long-term interest rates.
Individual pension provision must be developed. FECIF members perceive this need with their clients across Europe, whether is it to offer more choice and competition in markets with a developed long-term savings offering or simply to give access to solutions in less developed ones. Unlocking this could have a tremendous effect on long-term savings and investments across Europe.
The PEPP initiative was launched by the European Commission mid-2017. The European Parliament published a very promising working document earlier this year. Now, the European Council (representing individual countries) is looking at the project.
We remain absolutely convinced that PEPP has great potential, but three elements are needed to make it work, and they are not yet solved by the current proposals. FECIF is pressing these points in Brussels:
1. Tax treatment is a priority and must be addressed in innovative ways
Tax treatment is critical to the success of a savings product. The main issue is how to give PEPP products the same tax treatment as favourable local pension products, without overstepping national tax rules.
Current proposals either require 28 national compartments in every PEPP – not likely to be attractive to providers or to bring new benefits to individual investors – or a very hypothetical 29th tax regime that would sit next to existing countries. Both these approaches are impractical and doomed to fail.
A pragmatic solution could be for PEPP to offer only two compartments, which would dovetail with the majority of existing pension tax regimes:
- One ‘EET’ compartment where sums invested receive tax relief, build up tax-free and are taxed at exit, in line with many 2nd and 3rd Pillar pension funds in the majority of Member States;
- One ‘TEE’ compartment where sums are invested after tax, build up tax-free and are tax-free on exit, which is the case for a minority of Member States and for individual savings products often also used for retirement.
This way, national authorities could more easily align the tax treatment of PEPP with their own national comparable Personal Pension Products, without needing to change local tax rules or to create compartments for each and every country. We believe it is important for PEPP to test some innovative, consumer-centric approach to avoid getting bogged down and adding extra layers of complexity to existing solutions.
2. There is much debate around suitable (default) investments within PEPP
Current plans for the PEPP ask for a limited set of options, and a well-crafted default option, likely to be used by most participants.
The big question is the matter of guarantees. Should the default option provide a full capital protection, potentially resulting in a smaller retirement fund and the risk that it would be inadequate to meet retirement income needs? Or should the default be aimed at providing optimal performance for the investment horizon?
Given the lack of consensus as to what the default option should be, there needs to be more room in the PEPP framework for personal, client-centric advice.
3. Consumer information and advice or self-service
The matter of advice is not addressed in the working paper and little has been said about this subject in the ensuing debates. However, there seems to be a general view that beyond the basic default option, advice should be available, but not seen to be a priority for smaller contributors. FECIF regrets this, especially as there is no consensus as to what an advice-free default option should look like.
It is arguable that PEPPs should only be sold on an advised basis, even if the saver has chosen the default investment option – whether this be a real capital guarantee (not nominal) or a lifecycle investment option. The impact of national pension entitlements, varying decumulation options and retirement ages, particularly if the PEPP saver has cross-border accumulated benefits, strengthens the need for the PEPP saver to receive appropriate advice, regardless of the amount being saved.
As it stands, the PEPP project is at a crossroad. The (near) future will tell if it takes a step in the right direction, or on the road to nowhere.