PEPPs in Europe: Time to start thinking about a potential pan-European personal pension product offering

The market for personal pensions throughout Europe is currently fragmented as a result of a patchwork of rules hampering the development of a unified market at the European level. In some Member States, the market is virtually non-existent.

As a response, Regulation (EU) 2019/1238 of the European Parliament and the Council of 20 June 2019 on a pan-European Personal Pension Product (the PEPP-Regulation) establishes the legal foundation for a pan-European personal pension market, by putting in place an affordable and voluntary retirement-related investment product that can be managed on a pan-European scale, and ensuring standardisation of the core product features, such as transparency requirements, investment rules, portability and switching rights, minimum contract content and type of investment options.

1. What is PEPP?

A Pan-European Personal Pension Product (PEPP) is a long-term, individual, non-occupational (i.e. private, apart from a professional status) personal pension product, subscribed to voluntarily by a so-called ‘PEPP saver’ (see below) in view of providing income on retirement. As PEPPs should provide for long-term capital accumulation, the possibilities for early withdrawal before retirement are limited (‘closed PEPP system’).

A PEPP is financed by contributions paid to an (individual) PEPP account, either made by the PEPP saver, or by third parties on the PEPP saver’s behalf. Although PEPPs are not linked to an employment relationship, employers as third parties, may pay contributions to a PEPP on their behalf or for the benefit of the employee, self-employed person or another individual.

PEPPs are generally not aimed at replacing the existing public and occupational pension systems, but they merely serve as a ‘complementary’ pension product to the present national public and private pension schemes. Within the Belgian pension market, PEPPs will be categorised as third pillar pension products.

2. Eligible PEPP providers/distributors

The PEPP-Regulation differentiates between PEPP “providers” and PEPP “distributors”.

“PEPP distribution” is defined as “the activities of advising on, proposing or carrying out other work preparatory to the conclusion of contracts for providing a PEPP, or assisting in the administration and performance of such contracts”.

A PEPP provider is defined as a ‘financial undertaking’ (see below) authorised to both manufacture and distribute PEPPs that it has or has not manufactured.

A PEPP distributor is a ‘financial undertaking’ (see below) merely authorised to distribute PEPPs not manufactured by it. Insurance intermediaries under the Insurance. Distribution Directive (IDD) and investment firms that provide investments advice also qualify as PEPP distributors under the PEPP-Regulation.

Under the PEPP-Regulation, the following “financial undertakings” will be eligible to apply for registration of a PEPP (see below) and to offer PEPPs to the wider public:

• Credit institutions authorised in accordance with Directive 2013/36/EU (CRD IV);
• Insurance undertakings authorised in accordance with Directive 2009/138/EC (Solvency II);
• Investment firms authorised for portfolio management in accordance with Directive 2014/65/EU (MiFID II);
• Investment companies or management companies authorised in accordance with Directive 2009/65/EG (UCITS);
• EU Alternative Investment Fund Managers authorised in accordance with Directive 2011/61/EU (AIFMD); and
• Institutions for occupational retirement provision (IORPs) authorised or registered in accordance with Directive 2016/2341 (IORPS II) which, under national law, are authorised and supervised to provide also personal pension products. As under Belgian law, only employment related pension benefits can be administered by an IORP, Belgian IORPs will (under the current legislation) not be allowed to offer PEPPs as third pillar pension products.

3. Eligible PEPP savers

PEPP will be available to anyone having his/her residence in one of the European Member States wishing to save for their pension, regardless of their status (employees, self-employed, students, part-time or un-employed can all subscribe to a PEPP) and whatever their nationality, as also ‘third country individuals’ can save in a PEPP (provided that they are residents in the European Union).

It is expected that PEPP will be of particular interest to ‘mobile citizens’, as well as to self-employed workers who cannot count on a generous public or occupational pension within their respective Member State.

4. Types of PEPPs

• The PEPP-Regulation provides for different types of PEPP for a PEPP saver to choose from: In any event, a PEPP provider will have to offer the pension saver a safe, standard investment option – the so-called ‘basic PEPP’ – as default investment option, with costs and fees capped at 1% of the accumulated capital per year.
• In addition to this basic PEPP, PEPP providers can, further, offer up to six alternative investment options (the basic PEPP included) with different risk/return profiles. All these investment options shall be designed on the basis of a guarantee (subject to the relevant sectorial law applicable to the PEPP provider) or risk-mitigation technique which shall ensure sufficient protection for PEPP savers.

5. Core features of a PEPP

The PEPP-Regulation lays down the standardisation of the key PEPP features, the most important of which are described below.

1. Full transparency on the product, including costs and fees
   
   

   The PEPP-Regulation prescribes several transparency requirements for consumer protection purposes:

   • Prior to purchasing a PEPP, the potential PEPP saver should be provided with a ‘Key Information Document’ (KID), containing all pre-contractual information relating to the PEPP being offered.

     The KID sets out the main information about the PEPP and its investment option (such as the PEPP’s long-term objectives, a description of the type of PEPP saver to whom the PEPP is intended to be marketed, a description of the possible forms of out-payments, a summary risk indicator identifying the riskiness of different PEPP investment options etc). It is highly standardised to enable full comparability amongst PEPPs to provide relevant information to prospective PEPP savers. A separate PEPP KID shall be drawn up for the basic PEPP.
     
     

   • Also, over the life of the product, a PEPP saver shall be provided, annually, with a standardised Pension Benefit Statement.

     The Benefit Statement will enable the PEPP savers to easily track and monitor the development of their own PEPP savings and shall include, amongst others, information on pension benefit projections, the contributions paid by the PEPP saver or any third party into the PEPP account, a breakdown of all costs incurred by the PEPP saver over the previous 12 months, etc. The Benefit Statement is aimed at enabling the saver to take informed decisions on potentially changing the investment option, switching providers or adapting the contribution levels to achieve the PEPP saver’s retirement objective.

2. Mandatory “fully fledged“ advice
   
   

   Consumers will also benefit from full mandatory advice, both prior to purchasing a product, as well as just before retirement.

   • Prior to the conclusion of the PEPP contract, the PEPP provider shall be obliged to provide the prospective PEPP saver with a personalised recommendation explaining why a particular PEPP (including a particular investment option, if applicable) would best meet the PEPP saver’s demands and needs (comparable with the so-called ‘suitability test’ under MiFID II and IDD).
   • Additionally, PEPP providers are also required to provide consumers with personalised advice just prior to effective retirement (personal retirement planning), to ensure that they choose the most appropriate form of payment for their specific needs.

   In no event, a PEPP saver can waive his right to the above advice.
   

3. Portability
   
   

   One of PEPP’s main characteristics for purposes of creating the single European pension market, is the so-called ‘portability’ feature provided for in the PEPP-Regulation. PEPP savers shall have the right to use a portability service when changing their residence to another Member State by opening a PEPP sub-account with the same PEPP provider in their new Member State of residence (in case such option is available with their PEPP provider). In case portability is not available (because the PEPP provider does not provide for such an option in the new Member State of residence), consumers will be given the possibility to switch provider, free of charge and without delay, or to continue to contribute to the PEPP on the previous country residence.

   When using the portability service, PEPP savers are entitled to retain all advantages and incentives granted by the PEPP provider and connected with continuous investment in their PEPP.
   
   
4. Switching right
   
   

   Lastly, a PEPP saver will have the right to switch PEPP providers at a capped cost after a minimum of five years from the conclusion of the contract, and in case of subsequent switching, after five years from the most recent switching. A PEPP provider may allow PEPP savers to switch PEPP providers more frequently.

6. PEPP-offering

1. Single PEPP passport
   
   

   A PEPP may only be provided and distributed within the European Union if it has been registered in the central public register kept by the European Insurance and Occupational Pensions Authority (EIOPA). Registration of a PEPP shall be valid in all European Member States. This ‘single PEPP passport’ entitles the PEPP provider to provide the PEPP and the PEPP distributor to distribute the PEPP registered in the central public register throughout the whole European Union. Due to the standardisation of the core PEPP features (see above) and this passporting regime, providers will also be able to sell PEPPs online.
   

2. Distribution and prudential regime
   
   
   • Sectoral distribution regime: The distribution regime of the PEPP will follow a sectoral approach. Insurance companies and insurance intermediaries distributing PEPPs will have to apply the provisions of the IDD, whereas investment firms and all other PEPP providers and distributors will be subject to the provisions of MiFID II.
   • National prudential supervision: PEPP providers will be supervised by their national competent authorities (i.e. for Belgium the Financial Services and Markets Authority (FSMA) and the National Bank of Belgium (NBB), dependent upon the type of service provider), in accordance with the relevant sectoral prudential regime and the rules laid down in the PEPP-Regulation.
   • EIOPA monitoring: For purposes of supervisory convergence, EIOPA will monitor the evolution of the PEPP market and will, when certain conditions are fulfilled, have the power to temporarily prohibit or restrict the marketing, distribution or sale of certain PEPPs or PEPPs with certain features. This could be the case if the proposed action addresses a significant PEPP saver protection concern, including with respect to the long-term retirement nature of the product, or a threat to the orderly functioning and integrity of financial markets, or to the stability of the whole or part of the financial system in the Union, and subject to certain specific conditions.

7. National regulation

The PEPP is based on a Regulation (and, therefore, is directly applicable in the various EU jurisdictions). However, there remains limited room for the national regulator to provide for a national regulation.

As far as tax is concerned, the European Commission encouraged the EU Member States in its Recommendation on PEPPs Tax Treatment of June 2017 to grant the same tax treatment to PEPP as to similar existing national products to ensure that the PEPP is successfully introduced, irrespective of whether a PEPP is provided by a provider from another Member States or would not satisfy one or more criteria under national tax law to obtain tax relief.

The national regulator shall also provide for local legislation on the conditions related to the accumulation phase of the national sub-accounts (including in particular age limits for starting the accumulation phase, minimum duration of the accumulation phase, maximum and minimum amount of contributions and their continuity).

8. Next steps

The first PEPPs are expected to enter the market by the beginning of 2022, i.e. at earliest, 12 months after the publication of the EIOPA Regulatory Technical Standards in the EU Official Journal. As the European Commission has approved EIOPA’s Regulatory Technical Standards per 18 December 2020, we expect the publication of the Standards in the EU Official Journal to take place very soon.

Therefore, it is time for financial services firms to start thinking about a potential PEPP-offering and how to tailor such PEPP into existing business models.

Please contact Pierre Berger, Isabelle Van Biesen or Marie Goossens, if you would like to discuss the impact and opportunities of the PEPP Regulation.