The accessibility of pensions and how to encourage greater take up among working people is a current priority for the European Commission (EC). During the summer months, the EC showcased ambitious proposals for uniformity in pension products across member states.
A pan-European personal pension product, PEPP for short, certainly will increase pension provision on a continent where pension schemes are a low priority for many citizens. According to the commission, just 27% of Europeans between the ages of 25 and 59 have enrolled themselves in a pension product.
PEPP would contribute to unlocking this vast potential and boost investment [more capital becoming available for long term investment] in our economy, the EC added, upon releasing its proposals at the end of June.
Is there a need for PEPP and how would it work?
Voluntary personal pension plans are already in existence. Each country in the European Union has their own system of pension, state-run or private, designed to help people save for their retirement years. Indeed, the industry is believed to be worth about €700bn.
Whether it is a lack of interest, restricted financial means or limited advice, the uptake has been slow. Last year, the Organisation for Economic Cooperation and Development (OECD), reported that 60% of Irish private workers have no jobs pension while there is a 100% coverage and special pensions provisions for politicians, and 100% coverage for public sector workers. This means the Irish private sector’s total pension spending as a ratio of 6.1% of gross domestic product (GDP) in 2011 is the lowest in the European Union and almost half the ratios those in the Netherlands and Germany.
Just 41% of Ireland’s working population is covered by a private pension scheme, whether that is in the workplace or a private plan. This in the years ahead certainly will put the State’s current account under enormous strain as currently such pensions are unfunded.
The question must be asked why the EC, knowing pension participation is low, thinks pension uptake can be boosted by a new class of product? Consumers are not blind to the fact that pension packages are available to them and that independent advice can be readily sought on such matters if desired.
According the EC, the problem is choice. The commission, in its wisdom, believes PEPP is a more inclusive form of pension planning because it can operate across country boundaries thus making their type a more competitive and attractive option for savers.
One of the stipulations is that PEPPs will have the same standard features wherever they are sold in the EU and can be offered by a broad range of providers, such as insurance companies, banks, occupational pension funds, investment firms and asset managers.
To further explain, the EC said: [PEPPs] will complement existing state-based, occupational and national personal pensions, but not replace or harmonise national personal pension regimes.
To do this, the commission recommends that member states grant the same tax treatment to the product as existing national products.
Pensions without borders want to tackle a European market that is according to the commission fragmented and uneven.
The variation in pension packages available to EU citizens varies from country to country. PEPPs on the other hand would create uniformity and greater protection for consumers by:
- Offering more choice from a wide range of PEPP providers; perhaps cheaper options for pension providers to offer their products and services in a larger market
- Ensuring PEPP providers are authorised by the European Insurance and Occupational Pensions Authority (EIOPA);
- Allowing the free movement of pensions from country to country;
- Facilitating cross-border distribution.
What does this mean for employers and trustees of pension schemes?
While the idea behind these proposals is to make pensions more accessible to individuals, employers may be wondering how PEPPs concern them. In fact, PEPP is directed not just at individuals seeking a pension but employers too. PEPPs will be encouraged for consideration by companies looking to put a pension in place for their employees.
The Commission said: PEPPs will be available to all individuals who are keen to save for retirement, be they employed, unemployed, in work or in education. PEPPs could be particularly attractive to both mobile citizens and self-employed individuals who are not participating in state-based or occupational pension provisions. Young people could also benefit from starting to save for retirement early: the longer the investment horizon, the more the PEPP can contribute to income in retirement. As PEPPs will be complementary retirement savings products, one can contribute to a PEPP even when already in retirement.
PEPP options can have an advantage for employees and employers in a workplace where a job for life no longer exists. Staff move from company to company and employers hire often. What a PEPP group pension scheme allows for is employees to move jobs more easily with their pension. In other words, a PEPP can exist harmoniously alongside a state pension, occupational pension and national personal pension, but will not interfere with an existing scheme in any way. Employers too may benefit from having an easy to use pension scheme in place for employees with low risk affirmations, no matter how long they remain in the job.
There is an argument too for SMEs. Sometime small and medium enterprises can struggle with the implementation of a group pension scheme because of costs, overheads and limited funds. A PEPP plan to accommodate staff could be easily implemented with umbrella regulation across the EU and without the risks often posed by more complex and expensive pension options. With the European Commission providing a benchmark for how schemes would operate, what can be deducted from monthly salaries and how, employers may find the process far more user friendly in the long-term.
But this is where independent advice will be key. Companies and trustees who are considering moving employees towards a PEPP structure or proposing to educate staff on the option of having a PEPP in addition to an existing plan will need a greater understanding of what the European Commission is proposing, PEPP tax treatments and how they can exist alongside or in place of existing schemes. The end goal is always the same: to boost private savings for the pension holder in their retirement years.
The PEPP post mortem:
The PEPP proposal is still at discussion stages within the European Parliament and the council but once adopted it will come into force 20 days after its publication in the Official Journal of the European Union. Some pension commentators have their reservations about treating a topic as intricate and complicated as pensions in the same manner as consumer laws relating to roaming charges on mobile phones across member states.
As with any new blanket proposal, caution will prevail. The commission has said the PEPP will work in tandem with any national and existing pension packages within each EU country and fall under the same tax treatment on same. The idea of encouraging and nurturing the saving patterns of people towards their retirement years is also to be applauded. Pensions are often presented in a manner that can be tedious or convoluted to younger people so a pan-European plan with the same rules and regulations is likely to resonate positively with this audience. The PEPP may also generate a greater understanding of pensions and their place.
Irish MEP, Brian Hayes, eloquently summed up the idea of PEPPs and their place in Ireland when he said: The EU’s new personal pension product may not be the silver bullet to our pension time bomb but it offers huge incentives for consumers that want a simple, safe and transparent product to help them save for retirement.
The portability aspect of the product is a real benefit for the modern day workforce as the product can be easily transferred from one member state to another. It would also make sense that consumers should switch pension providers easily if they can find a cheaper offer in another member state. Consumers should be able to shop around to get value-for-money products that’s why we have a single market.
If existing personal pension products are morphed into PEPPs (such as the existing PRSA’s becomes PEPP compliant) then it should help drive down costs for the consumer and complement the existing pension pillars (the State and Company Pensions). However, if this is presented as another alternative it might serve to confuse non-financially astute would-be-savers. While it might not be a panacea it certainly can do no harm and for those likely to be working in a number of different EU countries it certainly will solve a few possible headaches as up until now transporting pensions around continental Europe was nigh on impossible.
Paul King is Acuvest’s Business Development and Client Manager. Contact Paul at firstname.lastname@example.org or follow him on Twitter @kingofpensions
Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.