By Peter Ohrlander

The Pan European Personal Pension, also known as ‘PEPP’, started to apply at the end of March. This completely new product will help address pension gaps and make EU-wide retirement savings possible. In a nutshell, the PEPP is portable, is transparent on fees and costs, and offers strong consumer protection.

Complementary pensions schemes

PEPPs are totally separate from a public or occupational pension. They are complementary individual pension schemes that people can contribute to on top of their public or occupational schemes. Take, for example, someone who is working or has been working in a Member State and has contributed to a personal pension scheme on top of their occupational pension because they would like an additional boost to their pension. What happens to that complementary scheme if that person moves to another country within the EU? The simple answer is: before PEPP, not much. Most people would find themselves locked in by a long-term contract that would not take into account the fact that they had moved to a different country. PEPP instead allows people to take their personal pension scheme with them when moving to another Member State. Also, under any circumstance, PEPP introduces a five-year maximum lock-in, which offers far greater flexibility. After five years, people can simply switch provider, including within a Member State, if they find an offer that better meets their needs.

But how does this work in practice? If somebody is moving to another Member State, what do they need to do? If the personal pension provider operates in the new country of residence, then all the customer would need to do is to inform their provider – their existing contract would keep running as before. However, if the provider does not operate in the new country of residence, the person can simply move to a new contract with another local PEPP provider active there. In other words, people can move their pension package alongside their luggage and furniture!

Tax incentives

What happens when there are tax incentives offered at national level? In many cases, existing contracts stipulate that customers will benefit from financial advantages such as tax breaks or better rates if they do not use their capital – this is to incentivise long-term savings. Aren’t customers going to lose out by moving their pension to another country? The Commission recommendation to Member States on PEPP and taxes clearly states that national tax incentives cannot be discriminatory. In other words, if someone buys a PEPP they will have the right to the same tax advantages as those available for other national personal pension products.

Be aware of costs

At the same time, PEPP is first and foremost designed to be a low-cost product that fits the needs of most people; a value for money proposition. In the past we saw much focus of tax incentives but often insufficient attention to costs of pension products and how these costs reduce the long-term gains for savers in a disproportionate way. To address this, the default option ‘the basic PEPP’ has a fee cap of maximum 1% of the saved capital per annum. Also, since banks, asset managers, pension funds and investment firms can provide this product alongside insurers, we can expect more competition and better conditions for everyone.

The PEPP Regulation has just started to apply and so these are early days and it’s a bit soon to see any trends emerging. However, a number of companies have already expressed interest in applying for a PEPP licence. Interestingly, at this stage it looks like young companies, such as FinTechs, are particularly keen to embrace this new concept.

The job of financial regulators now is above all to ensure that PEPP providers – be it banks, asset managers, insurers or other financial firms – offer products that are safe and that deliver good return on investment at a competitive price. After all, we are talking about people’s hard-earned money, and it’s crucial that their long-term retirement savings are safe.

Read more about PEPP

Peter Ohrlander is a Legal and Policy Officer at the European Commission