European pension reform plan aims to give savers better cross-border choices

Pan-European Personal Pension Product (PEPP) -the road ahead

On 29 June 2017, the European Commission published its proposal for a Pan-European Personal Pension Product (PEPP). The proposal aims at creating a European personal pension product to enhance cross-border saving and long-term investment. This pan-European product is meant to give citizens more choice and mobility across Member States when saving for retirement. It also seeks to address the pension gap in a number of Member States having less developed markets for pension products.

The European Commission built its proposal on advice prepared by the European Insurance and Occupational Pensions Authority (EIOPA),which carried out a public consultation in 2015 and issued its final opinion in 2016. The Commission also published a recommendation seeking to ensure that PEPPs benefit from the same fiscal advantages given to existing national pension products.

In this briefing we examine some of the core elements of the Commission’s proposal around the design of the PEPP, investor protection elements and the novel approach with EIOPA directly authorising the launch of products to the market. The proposal has provided answers on all these points but also raised a number of questions. Finally, we look ahead to the complex legislative process that will have to be navigated to make the PEPP a success story.


What is the PEPP?

The PEPP aims to be a truly European product sold and distributed across the EU. It does not aim to replace or harmonise existing personal pension solutions. The PEPP in its structure is a voluntary personal pension product (so-called 3rd Pillar product), complementing mandatory state pension schemes (1st Pillar) and occupational pensions (2nd Pillar). Consumers – defined as PEPP beneficiaries – who sign up to the scheme will make regular payments into their account over the duration of the agreed period (accumulation phase). Once they reach the age of retirement they will receive their pay-out (decumulation phase) in the contractually agreed form upon conclusion of the contract and based on the modalities of national pension law.

The PEPP introduces novel features – the possibility for the beneficiary to transfer accumulated wealth across Member States (portability) as well as the ability to transfer the accumulated wealth to another service provider (switching), thereby enhancing competition. The PEPP would also ensure a wider range of investment possibilities for consumers, while serving as a blueprint for personal pension products in Member States having a limited national market for such products.

At the same time, many features of the PEPP, like the conditions of the accumulation phase, the modalities of the decumulation phase and issues intricately linked to pension law remain a national matter. The PEPP can therefore not be considered a homogeneous European product that aims to harmonise all national products.


This pan-European product is meant to give citizens more choice and mobility across Member States when saving for retirement



Design of the product

Asset allocation
(Article 33)

The proposal contains investment rules the provider needs to comply with to implement the ‘prudent person’ principle. One of the main objectives of the PEPP is to raise capital and channel it towards long-term investments in the European economy, as some argue that pension assets can afford to take a longer investment horizon. By investing the longterm assets, beneficiaries could hope to capture ‘illiquidity premiums’ that tend to generate higher investment returns.

The provider however has an obligation to invest predominantly on public regulated markets, with a limited share of investments into illiquid longterm assets. There are therefore doubts as to whether PEPPs could really become a large-scale source of long-term financing for the European economy. Interestingly, stimulating the investment in instruments with a long-term horizon is one of the main policy intents (recitals 34 – 35).

Moreover, while the proposal aims at creating a harmonised product, the investment rules applicable to the product also depend on the sectoral legislation applicable to the provider (Article 33(2)), creating potentially a divergence between insurers and asset managers in terms of asset allocation possibilities.

Finally, the investment rules are unclear on whether the PEPP must directly invest on regulated markets (shares, bonds, ETFs) or could also indirectly invest in regulated markets through non-listed UCITS funds.


Investment options (Article 34 – 39)

Each provider will have to offer the beneficiary the choice between up to five investment options, including one labelled as the ‘default option’. The default option must ensure the protection of the beneficiary’s invested capital on the basis of a number of risk mitigation techniques. The default option is expected to see the largest uptake as consumers are expected to avoid the more complicated alternative investment options bearing more risk.

This promises to be one of the most hotly contested provisions in the proposal as it remains unclear whether the provider should provide some sort of capital protection guarantee and/or a guaranteed return on investment. Requiring providers to offer capital guarantees or buffers may undermine the ability of a number of potential providers – particularly those not subject to prudential regulation – from offering the product at a competitive price. And it may have some fiscal ramifications (see below).

The risk mitigation techniques will only be developed at a later stage by the European Commission through Delegated Acts (DA) (so-called Level 2 rules). Industry participants will not have clarity on this point for the foreseeable future.



Consumers are increasingly curious and eager to know whether and how the financial products they buy contribute to furthering environmental, societal and governance goals. In January 2017, the European Commission launched its High-Level Expert Group on sustainable finance which issued its interim report in July, only a few weeks after the publication of the proposal. One of the key recommendations of the interim report is to create an EU classification of sustainable assets and labels for products, including sustainable funds.

However, the integration of ESG factors in the investment process seems not to be a binding requirement in the design of the PEPP. Even though the preamble considers the importance of such factors and encourages their inclusion in the risk management system, the incorporation of ESG factors remains voluntary. The only reference to ESG in the proposed regulation itself is made through the rules on pre-contractual information (PEPP KID) and regular disclosure (PEPP BS) which must indicate how ESG factors are taken into account in the investment policy.


One of the key recommendations of the interim report is to create an EU classification of sustainable assets and labels for products, including sustainable funds.


Consumer and investor protection – disclosure and distribution


Disclosure to consumers (pre-contractual and recurring) (Article 23 and 27-31)

Like for all financial products, the provider will have to make available to the consumer pre-contractual information (PEPP Key Information Document) as well as during the period of the contract (Benefit Statement). Key information documents are already present for existing financial products such as UCITS and PRIIPS products. Especially the Level 2 rules around the PRIIPS KID proved to be particularly complicated to finalise. Will the rules on the PEPP KID – to be adopted in the form of Implementing Technical Standards (ITS) – be equally complicated to agree on? And how will the PEPP KID differ from the PRIIPS and UCITS rules?


Distribution – how will it be sold? (Article 8, 19, 20)

Intermediaries selling the product of other providers will have to be supervised. Insurance intermediaries supervised under the Insurance Distribution Directive (IDD) will automatically be able to distribute PEPPs of 3rd parties. Other financial undertakings will be able to distribute PEPPs  once they have gained the approval of their home Member States’ regulator. The exact requirements for this authorisation are not clear and could lead to different approaches between Member States.

A key discussion that emerged in the context of MiFID II and the Insurance Distribution Directive (IDD) was the ability for service providers to provide inducements to intermediaries to distribute their products. Under the proposal, the distribution and ability to pay and receive inducements will be determined pursuant to the sectoral legislation applicable to the distributor.

This means for instance that insurance intermediaries regulated under IDD could be subject to very different rules than investment advisors and wealth managers regulated under MiFID II. Under the IDD, an intermediary is allowed to receive inducements as long as there is no detrimental impact on the quality of services provided. Under MiFID II, an intermediary is prohibited from receiving inducements unless he can demonstrate that it enhances the quality of services provided to the client. This may have an impact on provider’s distribution strategies and their ability to offer their PEPPs to a wide customer basis.


A key discussion that emerged in the context of MiFID II and the Insurance Distribution Directive (IDD) was the ability for service providers to provide inducements to intermediaries to distribute their products



Authorisation and supervision?

Each PEPP manufactured and distributed in the EU will have to be authorised by EIOPA (Article 4). This is a rather novel approach as it is one of the first times that a European Supervisory Agency (ESA) is given direct power to authorise a financial product. Having EIOPA authorise all PEPPs would ensure a level-playing field amongst product providers and Member States. This however may be perceived by EU Member States and their regulators as a powergrab by the European Commission and EIOPA.

This will also lead to an interesting relation with the national regulators as they are in charge of supervising providers’ compliance with the regulation (Article 53). Moreover, as highlighted above, with the exception of intermediaries regulated under the IDD, national regulators will also be in charge of authorising intermediaries to distribute PEPPs.


Taxation – make or break?

Often the decision by consumers to purchase a financial product is driven by tax implications. For the PEPP to compete effectively with existing personal pension products offered in Member States, a PEPP will at the very least need to benefit from the same tax advantages. Without the same advantages, it is hard to see how the PEPP will become appealing to consumers.

Any legislative proposal involving the harmonization of indirect taxation would have required a unanimous agreement by Member States in the Council (Article 113 TFEU), which would immediately make the proposal unlikely to succeed. Therefore, to ensure the political feasibility of the proposal the Commission stayed clear of proposing rules around taxation and instead adopted a recommendation encouraging Member States to grant PEPPs the same tax advantages as existing personal pension products. Given the non-binding nature of the recommendation, one of the critical questions is how the Member States will be incentivized to give the same tax treatment to PEPPs if they have different features than existing national products, for example around capital guarantees.


Conclusion – a complex road ahead?

Now that the Commission has published its proposals, the co-legislators – the European Parliament and the Council – have already started to discuss the proposal and will formulate their own opinion. In the Council, number of Member States have expressed rather strong reservations about the proposal arguing the Commission should not seek to venture into regulating pensions, a national issue. Some Member States perceive the PEPP as being inherently an insurance product and would seek to restrict this product to insurers regulated under Solvency II. Finally, others feel the proposal will not result in a functioning product if too many features are left to national law such as the details of the accumulation, decumulation and pay-out modalities.

In the Parliament, the ALDE Group was given the position of Rapporteur to lead the negotiations on the proposal. It is still unclear which MEP will take the role of rapporteur and the other political groups on the ECON Committee have not yet nominated their shadow rapporteur.


How Hume Brophy can help

Now is the time to engage at EU level, with both of the co-legislators: European Parliament and Council. Hume Brophy is well placed to assist you in planning, executing and achieving your public affairs objectives around the PEPP and other issues of relevance to the financial services industry with policymakers, using our knowledge, expertise and contacts to achieve tangible and positive outcomes.

Victor van Hoorn, Head of Financial Services,

Leonard Dorny, Account Executive,