Have you ever heard of the Pan-European Pension Product (PEPP)? I will forgive you if you say no. Launched in 2019, the previous PEPP did not enjoy much consumer take-up as the financial industry rarely offered it to its customers. That could be about to change though, as the European Commission gears up to overhaul the PEPP as part of its Savings and Investment Union plans.
A European pensions crisis
Europe is facing a pensions crisis. With ageing populations, falling birthrates and increasing job automation in many countries, Europe is increasingly struggling to foot the bill for its state pension system.
In many countries, this has led to the state increasing the pension age and offering reduced pensions. This has pushed consumers to find alternative options to finance their retirement.
Europe is increasingly struggling to foot the bill for its state pension system.
However, the quality of many pension investment products – both occupational and private – in Europe remains poor. Many offer lacklustre returns (due to an overcautious investment profile in bonds/insurance), further weighed down by high fees.
The problem, though, is not a lack of products: it’s a lack of good quality products. This is leading consumers to disengage, leaving their money sleeping on current or savings accounts.
All this combined has meant that many are increasingly unable to afford a comfortable retirement.
Above: it has become increasingly difficult for many people to afford a comfortable retirement
PEPP to the rescue?
One workaround to help tackle the poor quality of products on offer would be to create a standardised product that can be quality controlled. Our German member vzbv made a proposal for just such a product that could be used as a blueprint.
The Commission’s plans for a revamped PEPP – a voluntary personal pension scheme that could complement existing public and occupational pension plans – would be the chance to create just such a solution.
On the positive side, the new PEPP would bring some much-needed simplifications. For example, it could be sold without mandatory advice. This would allow consumers who feel comfortable doing so to buy it online, without necessarily having to go through an advisor and allow for new market entrants.
What’s more, the old PEPP insisted on portability across the EU (hence the ‘Pan-European’ in PEPP). While nice to have, generating some kind of market for it at all is more important at this stage.
The need to keep a cap on costs
However, the Commission’s PEPP proposal would also mean some unwelcome changes for consumers. Notably, the Commission is looking to scrap the cost-cap of 1% fees on pension products. This undermines the whole project from the consumer perspective, as it opens the door to providers charging sky-high fees.
However, even with a cost cap, new market entrants could enter the market and provide mass-market retirement savings products online, for instance. This is only viable though if all products on the market are of suitable quality for consumers, which would require a cost cap to keep fees under control. This would then create more supply even if industry incumbents would prefer to stick with their current model of rent-seeking.
Above: the need to keep costs on retirement products under control is key
What’s more, the Commission is looking to potentially auto-enroll consumers into the PEPP. While potentially positive as it means more consumers are offered better retirement plan coverage, adding another poor-quality product would risk harming consumers who would see part of their income redistributed to the financial industry in the shape of fees eating into returns.
In the absence of a cost-cap, financial supervisors should at least be able to step in to enforce value for money for consumers. This should go beyond just industry reporting requirements, but should enable regulators to enforce the reduction of excessive fees on PEPPs.
A solution to the pensions crisis?
With an ageing population and a declining workforce able to foot the bill for Europe’s pensions systems, ensuring consumers have access to a range of good quality pension products will be vital to ensuring people can enjoy a comfortable retirement.
Ensuring…access to a range of good quality pension products will be vital
For too long, consumers have left money dormant on current or savings accounts, earning next to no interest. That so many choose this path is an indictment on consumer confidence in the current quality of retirement products on offer.
The revised PEPP could help to improve the situation by offering a standardised and simplified product. Consumer groups provide advice that people trust. Trust is a commodity that is currently lacking in retirements savings products and for good reason.
If the PEPP became a trustworthy solution, consumer groups could help spread the word. However, Europe’s financial regulators will need sharper teeth to ensure costs do not spiral out of control.