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The EU is well on its way to agreeing on a new European financial product rule, the Pan-European Pension Product (PEPP). Proposed a year ago, both the Parliament and the Council have finalised their readings, ready to have it adopted before this Parliament steps down. The PEPP is intended to make large-scale portable and cost-efficient savings products available throughout the EU. Over time, this first buy-side financial initiative from the EU under the capital markets union programme could become a significant investment vehicle in support of the EU economy, even overtaking the current UCITS, first adopted in 1985.
The generally limited savings of European households for retirement alongside the high costs of investment funds, and even higher costs for life insurance products, underscore the need for a well-structured PEPP. Currently, European households are overweight in deposits, which may also be caused by the inefficiency of the investment fund markets. European fund markets, which function as a private savings vehicle for retirement (3rdpillar), are very fragmented with a low average size per fund, and high charges.
Against this background, a PEPP should encounter a huge demand and go a long way to tackle the inefficiencies in current investment fund markets.
According to the Commission, with PEPPs receiving the same tax treatment as national products, the personal pension funds market could reach EUR 2.1 trillion by 2030. The Parliament reading (as well as that by the Council) has made the Commission proposal more attractive, by allowing for two default options (art. 39), guaranteed capital and life-cycle funds, and by reducing the requirement for providers to offer PEPPs in all member states. It has also set a maximum of 1% for the overall costs and fees of a basic PEPP. The Parliament has also added several provisions to improve the attractiveness of the PEPP, such as on the disclosure of product characteristics and investments, a redress procedure and portability.
The PEPP is thus well on the way to becoming an attractive EU-wide savings vehicle, provided the different funds achieve a minimum size. It is therefore essential that EIOPA maintains responsibility for authorisation of a PEPP, to allow it to monitor the number of providers with regard to market efficiency.
The proposal as it stands now remains fairly concise. Implementing rules are brief. The Parliament has chosen to limit these to ‘level 2’ rules (i.e. standards on risk mitigation techniques for capital protection; the format, key characteristics of the PEPP key information document (KID); and the decumulation phase) in order to maintain the attractiveness of the product. In this sense, it could become the ‘simple’ product we called for some 3 years ago.