The pan-European Personal Pension Product (PEPP)
The introduction of a uniform and portable pan-European Personal Pension Product (“PEPP”) will have multiple benefits for Europe as it would provide solutions to critical demographic challenges of an ageing continent. Although EU households are amongst the highest savers in the world, most of their savings are held in bank accounts with short term maturities despite the long-lasting low interest rate environment. By directing these savings to long-term investment products, individuals could benefit from higher target returns and the real economy from higher growth rates.
The European Commission published Regulation (EU) 2019/1238 (the “Regulation”) on the 20th of June 2019 to address these demographic challenges Europe is currently facing, by introducing the legal framework for PEPP. In August 2020, the European Insurance and Occupational Pensions Authority (“EIOPA”) issued draft Regulatory and Implementing Technical Standards which supplement the Regulation and provide proposals for various issues, namely pre-contractual and annual information documents for consumers, cost caps for certain types of PEPP, Risk-mitigation techniques, supervisory reporting, and cooperation between National Competent Authorities.
PEPP is a long-term savings personal pension product, which is provided by an eligible financial undertaking to a PEPP saver for retirement purposes and has no (or strictly limited) possibility for early redemption. It is particularly attractive for young people and mobile workers and will further facilitate the right of EU citizens to live and work across the European Union. Furthermore, given the long-term nature of some of the investment opportunities, PEPP is expected to support the supply of funds into the real economy. The purpose of the PEPP is not to substitute but instead to complement the existing pension systems of each member state.
PEPP may only be provided and distributed in the European Union, and each PEPP must be registered in the Central Registry kept by the EIOPA. It is a regulated product which requires national authorization, regular supervision of both provider and product by National Supervisory Authorities (“NSAs”) and monitoring by EIOPA. A large pool of financial providers may offer these products as PEPP providers, such as credit institutions, insurance undertakings, investment firms, UCITS management companies and Alternative Investment Fund Managers (“AIFM”). PEPP providers may offer their products domestically in their home Member State or internationally across Europe by utilizing passporting provisions of the Regulation.
Given the long-term investment horizon of PEPP savers, PEPP providers may invest in a broad range of assets, including infrastructure projects, unlisted companies seeking growth and real estate projects. In fact, the European Commission encourages PEPP providers to allocate sufficient part of their portfolio to sustainable investments with long-term economic benefits to the real economy.
One of the main advantages of PEPP is its mobility, which is extremely useful when PEPP savers change their residence to another Member State, and they need to utilize the portability service of the plan. In this case PEPP savers have three choices: (1) Continue contributing into their existing PEPP account, (2) Open a new sub-account to the new Member State of residence, or (3) Switch PEPP provider without delay and free of charge (or at a minimal cost) when the PEPP provider is not able to ensure the opening of a new sub-account in the new Member State of residence.
PEPP have several other advantages, such as cost-efficiency and transparency. The Regulation introduces the Basic PEPP as a default option for PEPP savers, which is essentially a safe product designed in such way to provide a guarantee on capital. The costs and fees for the Basic PEPP should not exceed 1% of the accumulated capital per year. The Regulation also ensures the transparency of PEPP since potential PEPP savers shall receive the related Key Information Document (KID) before signing up, which among others includes clear information about costs and fees, performance scenarios and the risk-reward profile of the PEPP.
With the expected launch date for PEPP fast approaching, the CFA Society Cyprus (“CFA Cyprus”) has taken several steps over the last year, aiming at raising awareness of PEPP amongst stakeholders such as PEPP savers, prospective PEPP Providers, and NSAs. These steps include: (1) providing feedback to the European Commission through consultation papers and targeted questions sent through the CFA Institute, and (2) meeting with the Cyprus Ministry of Finance (“MOF”) with the aim of practical suggestions on the implementation of PEPP in the local market.
CFA Cyprus has recently partnered with the CIFA Asset Management and Distribution Committee to set up a joint committee on PEPP. Members of this committee will share their views on PEPP related matters such as successful procedures implemented in other Member States to enhance the benefits to savers, suggested amendments to local legislation (e.g. through tax incentives for PEPP savers) and provide suggestions to ensure that prospective PEPP providers are subject to a common framework, regardless on the supervisory authority they are regulated by.
With the first PEPPs expected to launch in late 2021, opportunities exist for savers and prospective PEPP providers. For savers, PEPP will provide an optional supplement to the existing pension products offered locally. On the other hand, prospective local PEPP providers, such as Investment Firms, Fund Managers, Insurance Companies and Banks, may consider adding PEPPs to their existing product offerings to service both local savers and those across the EU, as internationally based providers may consider transferring their products to Cyprus based savers.
By Constantinos Kourouyiannis, CFA, Executive Director Easternmed Asset Management Services Ltd
Alkis Hajittofis FCA, CFA, Executive Director Resolute Investment Management (Cyprus) Ltd