Europe's future may lie in its pensions

The EU is set to introduce an entirely new class of pension products, according to a proposal by the European Commission currently under debate. Here comes the... PEPPs.

By Alexandru CIUNCAN

Almost one century and a half after Germany's first Chancellor, Otto von BISMARCK pioneered the first public pension system in Europe, the EU Commission is set to introduce the PEPP: Pan-European Personal Pensions. The initiative is said to bring multiple advantages, for both savers, the financial services industry and capital pooling, as set out in the CMU-Capital Markets Union plan.

PEPPs in a nutshell
The PEPP is designed to be a supranational voluntary system of individually funded pensions. In other words, EU citizens can contribute and basically buy more or less the same pension product regardless of their country and without affecting the existing national pensions arrangements, which are anyway very different between countries (The degree in which EU citizens still rely quite on the public pension systems differs from country to country. Some invest in occupational Pillar 2 schemes while others reportedly still share a belief that Governments will always step in and save the day).

In a nutshell: PEPPs are designed to be simple pension products, transparent in terms of costs and fees and, most importantly, portable between Member States. So, if all goes according to plan, one can start contributing to one of the PEPP funds in its home country and still be able to continue saving for retirement when moving to another EU member state, although the exact mechanism that providers would employ in order to allow this to happen is under debate. There are five investment options from which future pensioners could choose from, with a default one for those that either don't care or just don't have the time, patience and skills to look at the fine print.

But there are important issues still up for debate between stakeholders: politicians, insurance industry, asset managers, distributors and, most importantly, future pensioners - the ones that will benefit from the personal pensions. Needless to say, as this is still a work-in-progress piece of legislation there is a lot of value in debating some of the major discussion points.

The PEPP is probably the most tangible outcome of the Capital Markets Union and the first European initiative towards a single pensions market.

What future pensioners really want?
People generally want to have an adequate retirement income when they arrive to that point in their lives. With the low interest rates environment and given the shift from Defined Benefits schemes to Defined Contributions, retirement income is unfortunately not guaranteed anymore. So, it is fair to say that young people expect personal pensions to be safe life-long products that are simpleeasy to understand, transparent in terms of costs and commissions, less bureaucratic, accessible online, portable and that also address the issue of retirement for European citizens, for all of us. On a larger scale, personal pensions should be designed to fulfil the society's needs at a whole.

In terms of limiting factors of the PEPPs success, at least in the newer members of the EU, one needs to look at the still low purchasing power (just look at the household savings levels) in comparison with Western-European countries. On top of that, young future pensioners everywhere don't usually think about retirement and old age. In any case, PEPP Products should offer opportunities for more retirement savings, especially in emerging economies, as well as for cross-border mobile workers, and should offer pensioners adequate retirement income.

We all need to save more
OK. So, what if we have managed to enrich the offer of personal pension products if few potential beneficiaries understand or afford them? Which leads us to another issue at stake: how to encourage people to save more for retirement and, also, how to get younger generations interested in the PEPP? These are extremely important questions, especially given the inverted consumption cycle of pensions, but also since increasing the uptake of pensions require that future pensioners have to understand the need to contribute to a voluntary pension scheme given the falling replacement rates of public schemes and huge demographic challenges, start to save more and earlier than they currently do and, of course, understand what they are buying. Public awareness campaigns at both EU and national level, with best practices and projections of the future, such as testimonials, with concrete examples of how retirement can look like with or without proper savings can also encourage people to save more.

At the same time, we need to see how the PEPPs will be different from other national personal pensions and what other advantages they might bring (maybe used as collateral in credit ratings) etc.

In any case, education is key, alongside technology (e.g. mobile phone apps, social media etc.), in particular for younger generations. In example, mobile phone applications are not only a consultation tool, but they may also be used for communication and engagement purposes. There are already out there apps which helps its customers visualize what their retirement lifestyle will be like, based on their current savings levels, and interact in the social media.

Why trust the PEPPs as products?
In terms of trust, it is the EU labelling that should act as a quality mark. EU-related initiatives are mostly seen as trustworthy, having proper regulation and supervision, governance etc. although bureaucratic. But can this reasoning work in the UK or in The Netherlands? This remains to be seen. Another factor that can contribute to trust is offering transparency in terms of costs/commissions and risks faced by consumers. Consumers truly deserve to be adequately and realistically about their expected retirement income.

Could the PEPP initiative be successful without tax incentives?
Fiscal incentives have played an important part in the development of the pension industry everywhere. Therefore, most experts agree that tax incentives are key to the success of the entire project. In example, if some countries offer tax incentives to Pillar 2 pension products but not to the PEPP, there is little chance that future pensioners in those member states will also invest in PEPPs.

However, deductibility seems to be much more relevant in some countries than in others. In example, there are examples of countries in which tax incentives are mostly relevant to companies and not individuals, hence granting them will not cause a major uptake of pensions, but instead represent a gentle push.

With or without guarantees? What is a guarantee anyway?
As already stated, future PEPP pensioners will be able to choose between five investments options, with a default one available without advice. But how should the default option look like? How to rightfully balance the risk and future returns?

In terms of investment options for the PEPP, it is said that life-cycling and capital guarantees provide different levels of protection. So, there is an ongoing EU-wide debate whether life-cycling investment strategies should be allowed in the default investment option to protect the PEPP saver from potential capital losses? Both insurers and asset managers do their best to support their current positions, with asset managers naturally supporting life-cycling.

In other words, the safety of the capital invested should be the first and foremost priority. However, this should not hinder the flexibility of others, who may feel that their retirement saving should generate a certain rate of return and that are willing to accept to take some investment risk, to choose a more riskier investment option.

Decumulation decumulation decumulation...
A pension product is anything that provides the individual an adequate income when they arrive to the retirement age and that will continue to do that for the entire length of a persons' life. Given that pension saving products aim to provide an income during retirement, protection against longevity risk (i.e. through life-long annuities) should have priority over other forms of out-payments (lump sums or drawdown plans).

However, regardless of the final decumulation system established by the PEPP Regulation, its risks should be very clearly laid out and explained to savers. Consumers should be offered a realistic estimation of their expected retirement income (i.e. don't make promises that are not realistic). Decumulation is a core part of what makes a product a pension product - because it puts the emphasis on saving in order to provide an income throughout retirement. So, the risk of longevity must be covered, as this in the true nature of pension products as opposed to other investment products.

Just how important portability of your PEPP is?
Unarguably, portability is one of the key objectives the initiative sets out to achieve. This can be of great support to citizens moving from country to country. Thus, a compartment-based system is imagined by the draft PEPP Regulation - one that is criticized by many stakeholders and considered unfeasible for an economic standpoint by industry and which could potentially hinder EU citizens in smaller or less developed markets equal access to high-quality PEPP products. So, a solution must be found - otherwise there will be a rift between the offer of PEPPs in Western Europe, i.e., then in CEE and beyond.

All in all, although the compartment-based system currently included in the PEPP Regulation is questioned by many stakeholders - at the end of the day any system that would achieve the above-mentioned objectives and be workable is better than none.

Last but not least
PEPPs are in a class of their own. Standardized Pan-European pension products, authorized by the European regulator - EIOPA and supervised by national competent authorities with a layer of fiscal and, why not admit it, political issues on top. But what is clear is that PEPPs are another step taken in the direction of globalization, a product of the future in so many ways. Will it fly? That remains to be seen...

Share |

Related articles

photodune-3834701-laughing-girl-xs

Are GDPR non-compliance fines insurable or not?

Complying to the EU General Data Protection Regulation (GDPR), effective from 25 of May 2018, is currently one of the most challenging issues for many organizations. Even in the absence of a personal data breach incident, companies may face regulatory assessments resulting in fines and penalties. Moreover, companies operating on several territories, including the EU, may encounter situations interesting several jurisdictions with different legislation. How much can insurance help organization to manage this kind of operational risks?

2018-06-14
photodune-3834701-laughing-girl-xs

HOPE DIES LAST

Such a reading is also the most recent report of the GENEVA Association (details on them, HERE), suggestively titled "Understanding and Addressing Global Insurance Protection Gaps". Summarily, the material analyzes and seeks solutions for the so-called insurance protection gap. The phenomenon of under-insurance, on a global scale.

2018-06-07
photodune-3834701-laughing-girl-xs

Lloyd's: Cyber-crime, interstate conflicts or market crashes yearly costs may reach USD 320.1 billion

Man-made risks like cyber-crime, interstate conflicts or market crashes are a bigger threat to economic output than natural disasters, putting an estimated USD 320.1 billion of global GDP at risk on average each year, according to Lloyd's City Risk Index. Built in collaboration with Cambridge University, the study measures the impact of 22 threats on 279 cities' projected economic output.

2018-06-07
photodune-3834701-laughing-girl-xs

Swiss Re's 2018 SONAR Report: re-emerging or new risks - mostly related to new technologies or lifestyle trends - pose the largest challenges for the re/insurance industry

"While our trust in assistance systems remains unbroken, and their usage increases, humans are still held accountable and are expected to be able "take over the wheel" any time. While the law treats drivers mainly as it used to, actual driving practice and alertness are decreasing. The consequent widening skills gap not only impacts insurance risk, but also operational risks." This is just one of the risk evolving trends identified by the Swiss Re's 2018 SONAR report.

2018-05-31
photodune-3834701-laughing-girl-xs

Challenges and opportunities of agricultural risks transfer

Despite the rapid movement of the modern world towards digitalization, high technology and process sophistication, the longtime existing agricultural industry remains important for satisfying the primary needs of humanity in food and basic material. In parallel with all technological development people are returning to forgotten principles of sustainable nutrition. Can agricultural industry support this trend? Which challenges agricultural industry experience itself in the era of climate change? We have discussed these and other questions with Olena SOSENKO - International expert in agricultural risk management.

2018-05-23
photodune-3834701-laughing-girl-xs

CEE, FY2017: GWP and paid claims increased at the same pace: 11.5%

The CEE insurance market saw a 11.5% y-o-y growth in 2017, statistical data gathered by XPRIMM show. Overall, GWP amounted to EUR 36.12 billion. With a similar increase, paid claims reached almost EUR 22 billion. The forthcoming issue of the XPRIMM Insurance Report for FY2017, to be launched on May 14, will present in depth information in this regard.

2018-04-19
photodune-3834701-laughing-girl-xs

SERBIA: New Law on Compulsory Traffic Insurance announced

By 2020, Serbia should adopt new regulation in the field of insurance, which would follow the requirements in the process of European integration. The biggest challenge will be the adoption of the new Law on Compulsory Traffic Insurance, to replace the current Law adopted in 2009.

2018-04-12
photodune-3834701-laughing-girl-xs

Allianz Risk Barometer 2018 - Business Interruption and cyber-related incident, top threats for companies globally; NatCat risks return on the top risk agenda

Evolving nature of risk, and rise in cyber-related incidents, means business interruption ranks as top threat for companies globally, according to 1,900+ risk experts from 80 countries, the latest Allianz Risk Barometer shows. On the other hand, while the economic state of the global economy seems to arouse less concern, the strong wave of Nat Cat events brought by the second half of 2017 has placed once again natural catastrophes and climate change up on the risk agenda.

2018-01-18

ON THE MOVE

Three new appointments at XL Catlin insurance operations

XL Catlin insurance operations announced on 4 June three appointments: Donnacha SMYTH as President Global Excess Casualty Insurance; Carla GREAVES as Chief Underwriting Officer, Global Excess Casualty; Aurelie FALLON SAINT-LO as Senior Underwriter, Environmental and Client & Distribution Leader for Western France.

07.06.2018

TOP EVENT

LIVE: BAKU: "Insurance in Azerbaijan: New perspectives" Conference

The annual and most important insurance event within the Caucasus region - "Insurance in Azerbaijan: New perspectives", started today, in Baku, organized by XPRIMM and Azerbaijan Insurers Association, with the official support of the Financial Market Supervisory Authority of Azerbaijan.

20.06.2018

5th Annual Insurance Business Forum "Challenges of the Year 2018"

will take place on September 17-21, 2018 in Sochi
The upcoming Forum, supported by the All-Russian Union of Insurers (ARIA), will logically continue a detailed discussion of the most pressing issues previously raised at ARIA events in 2018: Insurance and Reinsurance International Congress in Moscow and Insurance International Conference in St. Petersburg.

12.06.2018

See all