On September 3, 2018 the ECON Committee of the European Parliament adopted its final report on the European Commission proposal for Regulation on Pan-European Pension Products (PEPP). This is a major step in providing EU citizens with new options for good-value and safe voluntarily supplementary pensions.
The ECON report stems from the discussions held during the ECON Committee and the amendments to the proposal concerns most of the areas covered by the regulation. This has produced a significantly different text compared to the Commission’s initial proposal.
Many players involved in the game
Financial institutions that will be allowed to manufacture and offer PEPPs include banks, life insurance companies, investment firms, UCITS management companies and AIFMs. Institutions for occupational retirement provision which are not able to cover biometric risks themselves are also included.
Entities other than the ones mentioned above that are authorised to provide personal pensions products under national laws’ provisions are also allowed to manufacture and offer PEPPs under the condition that their National Authority and EIOPA performs an assessment of their capability of offering PEPPs.
Centralized authorization procedure
Initially intended as a task assigned to National Competent Authorities (NCA), the Parliament proposes that the authorization of PEPPs will now be granted by EIOPA. EIOPA will liaise with NCAs for review and potential clarifications. The maximum delay granted to EIOPA for deciding on applications for authorization is set at 2 months.
In this configuration, EIOPA becomes the authority to which all subsequent changes from the application have to be communicated.
Guaranteed and investor-friendly portability across EU Member States
Confirming the portability principle set out in the compromise text of the Council adopted in July, the Final report enables PEPP savers to be offered a compartment of the scheme in a new country, or to be allowed to choose another PEPP provider free of charge. However, instead of demanding that PEPP providers make available compartments in all EU Member States, the Parliament has introduced the possibility to offer the portability service only in the country where the PEPP provider intends to do or will have concluded partnerships.
The switching service introduced in the Commission’s proposal was not affected by the discussions in the ECON Committee and was brought forward without modification in the ECON Final Report.
Investor information and on-boarding looking familiar
PEPP savers will benefit from equivalent protection and pre-contractual information as described in the prescriptions set out in MiFID, PRIIPs or IDD, by receiving Key Information Documents (i.e. a PEPP KID very similar to a PRIIPs KID), which contains information about the identification and characteristics of the PEPP manufacturer and distributor, details on the costs of the PEPP, suitability assessments, etc.
The procedures which financial institutions had to put in place to comply with recent regulatory developments are re-used in the Final Report, with no significant additional requirement.
On the other hand, specific information must be provided by existing investors on a yearly basis, in the form of a PEPP Benefit Statement. The content of this statement includes financial information from both a historical standpoint (history of contributions, ex-post costs details, past performance of the underlying assets to name a few) and from a prospective standpoint (such as pension benefit projections or acquired benefits).
ECON has also removed the 5 year past performance coverage with “any years available” now being recorded.
Investment Options and the Basic PEPP for dummies
One of the most significant additions in the Final Report is the inclusion of a Basic PEPP which consists in a default investment option and offers capital guarantee and cost-effectiveness (a maximum 1% of total costs per year is permitted) and must be provided with all PEPPs.
This definition of Basic PEPP may seem attractive for investors seeking income at retirement, but the Final Report does not include specific rules on managing the underlying portfolio and foresees that investors must at least recoup the invested capital, without mentioning the effect of costs and inflation. This could result in PEPP providers offering Basic PEPPs that would result in capital erosion for less educated investors and would mainly benefit manufacturers rather than investors.
In terms of other types of investment options, the Final Report does not include any maximum number anymore (the Commission proposal mentioned a maximum of 5 investment options for PEPPs).
Retirement possibilities that matter
The Final Report mentions that the decumulation details must be defined by Member States and must be no less favourable than the ones applicable in existing national rules.
The forms of out-payments suggested in the draft were all kept in the Final Report, allowing a certain level of flexibility and a mix between annuities, draw-down payments or total amount out-payment. However, the Basic PEPP is subject to restrictions in terms of decumulation and forms of out-payments possible (maximum of 30% withdrawal possible in the first retirement year, minimum of 35% in lifelong annuities if capital guarantee is provided).
Challenging structuration of a PEPP for Asset Managers
The Final Report mentions that Asset Management Companies authorised under the UCITS Directive and AIFMD are allowed to manufacture PEPP, which will increase competition within the pensions market by attracting new players.
Asset Managers that consider launching a PEPP will therefore be able to use either a UCITS or an AIF vehicle. However, considering the current status of the Final Report, both vehicles will cause structuring problems:
UCITS vehicles offer streamlined possibilities in terms of cross-border distribution to retail investors but also need to comply with investment restrictions and obliges the product to be compliant with stricter liquidity and eligible assets rules, whereas Non-UCIs or AIFs allow more flexibility in terms of liquidity requirements and investment restrictions.
However as harmonized rules only exist for distribution to professional investors, it obliges compliance with all national rules as far as cross-border distribution to retail investors is concerned. This will have a negative impact on economies of scale.
In consequence, as cross-border distribution to retail investors and adapted investment strategies contribute in part to the success of PEPP Regulation, it can be said that further analysis is required to allow the provision of PEPPs by Asset Management Companies… and avoid creating future headaches for them.