The European Commission has put forward a plan for a new EU-wide pension product that will complement existing state-based, occupational and national personal pensions. The pan-European personal pension (PEPP) package, which was proposed on 29 June, will help address the demographic challenges the EU is facing, by encouraging the supply of personal pensions to people across the EU by a broader range of providers.    

Why do we need this?

Europe is facing an unprecedented demographic challenge that will increase pressure on public finances. Over the next 50 years the ratio of pensioners to working-age people is expected to double – from four working-age people to one pensioner today to two-to-one by 2060. International bodies such as the Organisation for Economic Co-operation and Development (OECD) also note that the retirement income relative to the working-age income will decrease in EU Member States in the coming decades. In this context, the 2012 Commission white paper on pensions called for the development of supplementary pensions (occupational and personal), while a number of Member States are continuing to reform their state-based pension systems.

The Commission hopes the proposal will encourage more people to use these schemes and lay the foundations for a pan-European personal pension market. At the moment, things are very uneven across Member States: only 27% of Europeans between 25 and 59 years old has a personal pension product; while in 23 Member States, the figure is less than 15% of the whole population. Personal pension products are subscribed by more than 15% of the population in Austria, Germany, Slovenia, Spain and Sweden (source: Ernst & Young study for the Commission).

What's new in the initiative?

The PEPP proposal is not intended to replace existing pension schemes, but rather to complement them. It will ensure harmonisation of the core product features, such as transparency requirements, investment rules, switching and portability. In addition to the proposal, the Commission is also recommending national governments to extend tax relief to the PEPP, even if it does not match all national criteria for tax relief.

For savers, PEPPs offer a number of benefits. One of the big advantages is that they are pan-European. With one product authorisation from the European Insurance and Occupational Pensions Authority (EIOPA), providers will be able to distribute the PEPP throughout the EU. And savers will be able to take the PEPP with them when moving from one EU country to another. PEPPs will offer up to five investment options, including a low-risk default option, which will ensure that the saver recoups at least the capital invested. Savers will be able to buy a PEPP (including detailed information and advice) online. Providers will have to disclose all fees in advance and savers will be allowed to switch provider periodically (every five years) at a capped cost. Finally, providers may offer different types of decumulation (annuity, lump sum, regular withdrawals or a combination of all of these). Other product features are flexible and could be set at either Member State or provider level.

For providers, PEPPs represent a new market opportunity. The proposal allows PEPPs to be offered by a broad range of providers, such as insurers, banks, asset managers, occupational pension funds and certain investment companies. An external study conducted by a consultant for the Commission also indicates that providers could benefit from a larger market. According to the study, while the current personal pension market amounts to €700 billion today, it could reach €2.1 trillion with the PEPP by 2030 (assuming it receives favourable tax incentives in all Member States). Without the PEPP, it is only expected to reach €1.4 trillion.

How does this fit into the CMU?

The PEPP is one of the key measures that were announced in the June mid-term review of the Capital Markets Union (CMU). The PEPP proposal is expected to attract more savings into long-term investments, increasing the depth and liquidity of EU capital markets by increasing their volumes by up to 2%.

The CMU is also an important element of the Investment Plan for Europe. Due to the long-term nature of pension liabilities, PEPP providers will have an incentive to match these savings by investing in long-term projects, such as infrastructure and corporates. The PEPP proposal will, for instance, lead to an extra €14 billion of investments by 2030 in unlisted infrastructure projects, according to the Commission impact assessment.

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