The proposal for a pan-European personal pension product (PEPP) is “timely and appropriate”, according to the European Parliament’s lead on the project.

In a working document prepared for the parliamentary Economic and Monetary Affairs Committee (ECON) ahead of it discussing the PEPP on Thursday, Dutch MEP Sophie in ‘t Veld said a well-developed third pillar must contribute substantially to improving the adequacy and sustainability of existing pension systems.

However, she also said further development, strengthening and reform of first and second pillar pensions must be prioritised.

The European Commission proposed a regulation on a PEPP in June. In ‘t Veld is the European Parliament’s rapporteur, and will therefore lead and coordinate ECON’s work on the proposal. The working document reflects her initial views – or, as she told IPE, “the policy options and dilemmas we have to respond to”.

Some in the European pension fund industry are unhappy about the PEPP. The German occupational pension fund association, for example, has opposed its introduction, saying the focus should be on expanding workplace pension provision rather than on private pension products. A German corporate pensions executive has criticised the PEPP as “the answer to a question nobody asked”.

Many others have welcomed the idea of a PEPP in general, but have been quick to raise questions and doubts about its design and feasibility. Sticking points include tax treatment, whether or not there should be a default option with capital protection, and supervision.

In the ECON working document In ‘t Veld described the situation: “There is broad support for the idea of PEPP, but the context is extremely complex and politically sensitive. The differences between [the] 28 member states of the EU are huge and intricate.”

“However, the status quo is not an option,” she said. 

The proposal for a PEPP was timely and appropriate, she added.

In ‘t Veld has previously said lawmakers needed to take care not to undermine well-functioning national pension systems where these exist. 

Sticking points

The working document set out In ‘t Veld’s thoughts on some of the main issues and dilemmas arising from the Commission’s proposal and how these might be resolved. 

The Commission’s proposed regulation foresaw pension funds as one of six PEPP providers, alongside insurers, banks and other entities.

However, In ‘t Veld noted that, in some EU countries, institutions for occupational retirement provision (IORPs) had exclusive rights to provide occupational pensions, meaning that the PEPP regulation “should not in any way jeopardise well-developed second-pillar systems”.

“That would be defeating the very purpose of PEPP,” she said.

IORPs with exclusive rights would have a competitive advantage over other providers, the ECON paper said. However, categorical exclusion of IORPs from providing PEPPs would reduce competition and choice, and exclude institutions that have extensive experience in retirement provision. 

“PEPP will be as strong as the weakest link in the chain.”

Sophie in ‘t Veld, ECON rapporteur on the PEPP proposal

According to In ‘t Veld, this dilemma could be addressed by redrafting the regulation so that only IORPs with a legal statute that allowed them to engage in commercial activities could be eligible as a PEPP provider. The regulation could also be amended to allow the activities of IORPs implementing mandatory auto-enrolment to be ringfenced from PEPP activities.

Policy officials at Dutch pension manager APG have previously questioned how allowing pension funds to be eligible PEPP providers was compatible with the EU’s new IORP Directive, and said it might not be possible for Dutch IORPs to offer PEPPs.

Tax treatment

Unanimity on “any kind of tax harmonisation” among EU countries was highly unlikely, but there may be alternative routes, according to In ‘t Veld. For example, a group of member states could advance on the basis of a voluntary multilateral approach, or agree on a separate, “29th regime” approach that would allow for a specific tax treatment of the PEPP.

She said that, while the PEPP would have to come with tax incentives on contributions in order for it to be successful, this would bring complexity and the risk of tax avoidance or evasion.

It was crucial that this be resolved, possibly via a multilateral tax agreement between participating member states or with EU instruments for information exchange and coordination, said In ‘t Veld.

Just 3.7% of Europeans work across country borders, the ECON paper said, and not all were likely to take out a PEPP.

The Commission has so far issued a recommendation to encourage member states to apply the necessary tax relief.

Capital protection

The Commission has proposed that PEPP providers offer up to five investment options, including a default option. This, and whether a default option should ensure capital protection, is disputed – some have argued a default option should not be required, and that a capital guarantee would eat into returns and reduce competition.

The Commission’s proposed text refers to a default investment operation needing to ensure capital protection but, In ‘t Veld said, it was still unclear if the proposal required a default option with a capital guarantee. She argued for the regulation to specify the risk-mitigation techniques, including the definition of ‘capital protection’ for a default option.

Authorisation and supervision

A European authorisation procedure and uniform, high standards of enforcement and supervision throughout the EU were a prerequisite for the PEPP to be a truly European product and a success, according to the ECON working document.

“This should be achieved through common standards, and coordination of national supervisors by EIOPA [the European Insurance and Occupational Pensions Authority],” it said. “PEPP will be as strong as the weakest link in the chain.”

Although national supervisors would supervise PEPP providers, EIOPA should give authorisation its “stamp of approval … so as to create a brand known and trusted throughout the EU”.

The liability of national supervisors and EIOPA in case of problems with a PEPP still needed to be clarified, In ‘t Veld said.

The full ECON working document can be found here.

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