Over the next 50 years, the number of individuals of retirement age compared to the working population is forecast to double in Europe. Reforms to national pension systems are deemed essential by many with a special emphasis on increased individual accountability.
PEPPs are being positioned by the EU as an important new option for EU citizens to save for retirement in an active manner. This may prove particularly relevant in those EU markets that have traditionally lacked a strong pension industry, such as in Eastern and Southern Europe (see Figure 1). In addition, a PEPP could become an important savings tool for the growing number of self-employed such as in the Netherlands.
As well as helping address the long-term sustainability of the EU pension system through higher individual accountability, PEPPs are expected to yield additional ancillary benefits for the EU – one example would be increased investment into new long-term infrastructure PEPP funds. Essentially, the EU hopes the PEPP will be a key instrument towards achieving more sustainable pensions while promoting regional economic growth and further contributing to the development of the Capital Markets Union.
“Many people don’t start thinking about their retirement income until they are getting close to retirement and for many people this is too late. The reality of today is that many Europeans are probably not saving enough for their retirement to keep their standards of living,” said Sandra Hack, Principal Expert on Policy at the European Insurance and Occupational Pensions Authority (EIOPA).
While PEPPs seem to offer clear benefits conceptually, much uncertainty remains both in terms of design and practical implementation. The industry expects to receive further guidance from EU rule makers on the design, such as the proposed cross-border PEPP tax treatment in the context of heterogeneous national tax regimes.
In the meantime, there are key preliminary considerations for three distinct groups of market participants — consumers, pension providers and custodians — as they navigate the implementation of PEPP.
PEPPs are intended to provide consumers with more choice and more competitive financial products, based on a number of intrinsic features.
The commercial potential of PEPPs is still uncertain, but there are a number of key points for market participants to consider.
From a sponsor perspective, PEPPs offer an attractive solution to multinational corporations that need to consider cross-border pension solutions for their employees, and to corporations in domiciles that traditionally do not have a strong pension provision.
For plan providers, PEPPs create a new savings product that can be passported throughout Europe and possibly third countries on the basis of regulatory equivalence. Given their existing experience in managing investment funds, insurance companies and investment managers – both EU and non-EU based – would appear to be natural providers of PEPPs. A few additional points to consider are:
“Lacking a strong complementary pension system, the PEPP is a great opportunity to revamp saving for retirement in Portugal,” said Valdemar Duarte, General Manager of Ageas Pensões. “It is a simple, flexible, modern and cost-effective product with strong investor protection. Given the mandatory 1% cost cap, a certain minimum scale is required for commercial success and up-front tax incentives should be considered.”
Notably, PEPPs do not differ in principle from fund structures that custodians are servicing today. In practice, this means custodians can position their core fund service offering to support PEPPs via custody, fund accounting and transfer agency. However, PEPPs include some components that will allow custodians to provide additional value-added services – these include, but are not limited to Environmental, Social and Governance (ESG) data and analytics services, customized reporting and compliance monitoring. Additional areas where custodians may play an important role for PEPP providers are:
“Given the focus on sustainability, plan sponsors and providers need transparency to make ESG investing a reality. Custodians can assist by acting as the single ESG data hub, which plans can leverage for stakeholder reporting and analysis of ESG risks and opportunities” said Hani Kablawi, Chairman of International at BNY Mellon.
While there is still uncertainty over how PEPPs will work in practice, more clarity will emerge throughout the year. Success will depend on strong supervision and close cooperation between national regulators across EU Member States – and effective communication to market participants.
It’s expected some market participants will begin launching PEPPs in the second half of this year to capture new flows. As they consider their options in this process, custodians will be well placed to advise and guide PEPP providers on the best operational outcomes for both themselves and their customers alike.