The Pan-European Pension Product, known as PEPP, has struggled to gain traction since its 2022 launch, but proposed reforms under «PEPP 2.0» could create significant opportunities for Luxembourg’s fund and asset management industry, writes Sebastiaan Hooghiemstra in this contribution as Investment Officer knowledge partner.
Regulation (EU) 2019/1238 (“PEPP 1.0”) was adopted in 2019 and is applicable since 22 March 2022. Till now, the uptake of Pan-European Pension Products (“PEPPs”) is disappointing. EIOPA published a Staff Paper on 11 September 2024 (the “EIOPA Feedback”) in which it published its preliminary views with respect to the upcoming review of PEPP 1.0 in 2027. This contribution provides an overview of the recommendations in the EIOPA Feedback and reflects on these.
Background: The limited success of PEPP 1.0
A number of supply- and demand-side factors have been identified by the EIOPA Feedback as to why “PEPP 1.0” has had limited success so far. On the “supply side”, indeed, the so-called costs and fees cap of 1 percent of the accumulated capital per year in relation to the “Basic” investment option of a PEPP (not to other investment options) has been often mentioned. Another reason identified is the administrative burden arising from, in particular, the managing of sub-accounts across various Member States with differing accumulation and decumulation rules and heterogeneous tax regimes.
On the “demand side”, the low pension participation, due to the current cost of living crisis, as well as the lack of “awareness” of the existence of the PEPP by Europeans have been mentioned in the EIOPA Feedback.
Lastly, the EIOPA Feedback also has identified a lack of efforts to implement PEPP 1.0 on the side of Member States. Various Member States have implemented the PEPP national provisions late and some even have not yet transposed PEPP 1.0 at all. Furthermore, many Member States do not apply the same (favourable) tax treatment to the PEPP as to other third pillar pension products, despite the Recommendation by the European Commission to do so.
EIOPA’s recommendations
EIOPA in its report has made numerous recommendations to improve both the “supply” and “demand” of PEPPs.
On the supply-side, EIOPA, amongst others, recommends combining second and third pillar products in a single PEPP pension product, introducing a “value for money” concept for PEPPs that would facilitate the abolishment of the cost cap and reducing the administrative burden by allowing national sub-accounts for PEPPs to be voluntary.
With respect to demand-side factors, EIOPA recommends introducing auto-enrolment in the PEPP and leverage pension tracking systems for PEPP adoption.
Lastly, EIOPA recommends that all Member States grant the same tax treatment as national personal pension products and to implement national or EU-wide pension dashboards.
Points overlooked by EIOPA and opportunities for Luxembourg?
It is not to be excluded that a PEPP 2.0 will follow the footprint of UCITS and ELTIFs. Both UCITS and ELTIFs were not that successful when they came out under their first iterations, but reflections and feedback improved the products. UCITS became a (global) success and ELTIFs are also increasingly being launched after ELTIF 2.0 took effect.
What the EIOPA Feedback seems to overlook is that PEPP is mainly a potential opportunity for fund/asset managers to step into the (voluntary) pension market on an EU wide basis. However, till now, PEPP 1.0 accommodates mainly the needs of incumbent pension and insurance undertakings that have no incentive to launch third pillar “competing products” under the PEPP framework.
Hence, in order to boost the third pillar pensions market in Europe, the most important demand-side factor is that Member States, at least, extend their national tax treatments of their third pillar products to the PEPP.
From the supply side, it is essential that the PEPP becomes a more simple and less expensive third pillar product, which is not more heavily regulated than existing third pillar products and offers more value, due to the above-mentioned favourable tax treatment.
For that purpose, it is essential that the framework covers the needs for existing players, but also new players in the domain (i.e. fund/asset managers). To make that happen, PEPP 2.0 should remain to lean on existing EU sectorial regulations (e.g. AIFMD, UCITSD, IORPD, MiFID II, CRD, Solvency II & the IDD).
For fund/asset managers to enter this EU market, it is essential that the PEPP 1.0 mandatory complex investment rules for the “default” option will be largely abolished and that the PEPP product rules will not goldplate the existing EU products.
Only in limited instances, for example, in the case of investments in AIFs, additional investment rules may be required to be in place by limiting PEPP investments to ELTIFs, EuVECAs and EuSEFs only. The EU legislator should not overlook that the PEPP is, till now, a third pillar product that leans on existing EU products that already have an EU passport and, hence, PEPPs should thus offer more value with, for example, extra tax benefits to become a success.
In addition, the two mandatory advice moments can be optional instead of mandatory, as existing product governance, disclosure rules, as well as a suitability test offer enough protection for PEPP savers, and these also render the product complex and costly for PEPP savers. These essentials combined with some other flanking changes proposed with EIOPA for sure may lead for the PEPP (as a third pillar product) to be a success.
Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg and Senior Fellow of the International Center for Financial Law & Governance at the Erasmus University Rotterdam. The law firm is a knowledge partner of Investment Officer.
