The Pan-European Personal Pension Product (PEPP) Regulation (EU) 2019/1238 (PEPP Regulation or just PEPPR) came into force on August 14, 2019.
PEPPR lays the foundation of a new pan-EU standard for personal pensions that work alongside national pension schemes. The PEPP standardises certain core personal pension product features including:
- Robust consumer protection rules,
- Detailed investment rules including upon how sustainable the investments are,
- A limit on fees at 1% per year unless the product needs to contain a guarantee element,
- Transparency requirements including reporting of the ESG standards,
- Switching rights that enable portability when a saver moves to another Member State.
This is the first time that the EU has introduced a new financial product using a Regulation because the PEPP forms part of the Commission's wider work on the Capital Markets Union (CMU).
What is a PEPP?
The PEPP is a voluntary scheme that will sit alongside national pension schemes and offer a new pan-EU option for retirement savings.
It offers consumers an alternative way to save for retirement but in a highly standardised way that enables full comparability amongst different PEPPs so as to enable more informed decisions by prospective PEPP savers.
Key points arising as a result of the consultation
(i) Greater comparability of products To facilitate easier comparisons of PEPP products, providers must publish two mandatory consumer information documents: the PEPP Key Information Document (PEPP KID) and the PEPP Benefit Statement. The aim of these documents is to provide consumers with all of the relevant information allowing for easier decision-making before entering into a binding contract and then, later on, for easier monitoring of the PEPPs' ongoing performance.
(ii) Cost efficiency Cost efficiency is one of the major goals for the PEPP. The Basic PEPP is limited to an annual cost of 1% of the PEPP saver’s accumulated capital at the end of each year.
According to EIOPA, the “Basic PEPP” has been specifically regulated to offer a relatively high level of capital protection. It is understood however that certain legacy products such as fixed annuity PEPPs may still require paying additional fees to Insurers for guarantees. These additional fees are excluded from the cost cap but due to their size must be expressly disclosed.
(iii) Digital Access With the banking, investment & insurance worlds moving further towards digitalisation, online access is seen as one of the most important opportunities for consumers’ to engage with their PEPP to better plan how to achieve their retirement goals.
The use of digital means also eliminates many costs normally associated with legacy distribution networks.
(4) Transparency for consumers The PEPP consumer information documents introduce a 'summary risk indicator' in the PEPP KID, which identifies the riskiness of the different PEPP investment options. They also include comparative information to help consumers understand the relative risk to the expected future PEPP retirement benefits, as projections of future retirement income are key for consumers to assess whether the product meets their individual retirement objectives.
In this respect, the PEPP Framework is generally expected to build as much as possible on the application of Regulation (EU) No 1286/2014 (PRIIPs)3, while adapting the KID to the PEPP's retirement purpose to enable investors to select the most appropriate pension product.
National authorities will be responsible for authorizing PEPPs, and not EIOPA. EIOPA will instead be granted product intervention power with respect to the EU-level requirement placed on PEPP providers, which is set out in the delegated acts and based on the wording of the PRIIPS Regulation.
(5) PEPP Portability It should come as no surprise that the success of PEPP will depend on strong supervision and close cooperation between national competent authorities in the different Member States. EIOPA is of the opinion that regular supervisory reporting and solid product intervention powers will be necessary to ensure efficient and effective supervision and monitoring of the PEPP market, both at national and European levels.
(6) Tax Tax was never expressly mentioned when the PEPP was being set up. The presidency successfully resisted any requirements for Member States to offer tax incentives for PEPP savers in the PEPP Regulation (on the grounds that tax incentives are exclusively a matter for member states and as such the Regulation’s compromise text refers to "possible" incentives allowing a member state to offer incentives if they wish.
As such, the PEPP Regulation does not contain any specific tax provisions. The sub-accounts feature of the PEPP will enable savers to qualify for national tax incentives where they exist, provided the sub-accounts adhere to the corresponding national tax requirements for incentives.
PEPPR encourages Member States to grant the same tax treatment to PEPPs as to comparable national PPPs, so as to create a level playing field for the PEPP. Indeed European case law indicates that the Members States may not be able to discriminate between domestic personal pensions and PEPPs for tax purposes.
Nevertheless, PEPP providers are required to inform potential PEPP savers that the tax law of the PEPP saver’s Member State of residence may have an impact on the actual pay-out.