The European Union’s only pan-European personal pension (PEPP) product “significantly outperformed” other UCITS and ETF funds in 2023, according to academic research.

Speaking at a Better Finance webinar this week, Matej Bel University senior researcher, Ján Šebo, presented his findings on the rollout of the PEPP by the EU’s only provider, Slovakian-based Finax.

Regulation to allow PEPPs was launched in 2022 but the product has failed to take off. The European Insurance and Occupational Pensions Authority (EIOPA) recently published a paper on the future of the PEPP, setting out proposals for reform.

Finax’s PEPP is offered in four countries – its native Slovakia, Poland, Croatia and the Czech Republic. Šebo noted that its PEPP offers automatic de-risking through a lifecycle investment strategy.

“However, compared to most of the pension products, it will not end up 100 per cent in bonds. It will end up 60 per cent in equities and 40 per cent in bonds because it has been pre-tested before it hit the market,” he explained.

Finax’s PEPP offers two risk categories; one has an allocation that is 100 per cent to equities. In this case, at retirement, it is de-risked to a level of 60 per cent equities and 40 per cent bonds.

The second option, which is less risky, includes an allocation of 80 per cent in equities during the accumulation phase. This also drops to 60 per cent equities at retirement. The annual management fee for the PEPP is 0.72 per cent, per annum (0.6 per cent management fee plus VAT), well below the 1 per cent fee cap that has been a bone of contention for others in the industry.

Šebo continued: “It has significantly outperformed compared to UCITS fund benchmarks. We have compared [the PEPP] to more than 2,000 UCITS funds and ETF funds that are offered in EU markets. We have to say it is best in class compared to pension products in Slovakia.”

The nominal net performance in 2023 for the Finax PEPP 100:0 was 15 per cent (after fees) and 13.4 per cent (after fees) for the Finax PEPP 80:20. Therefore, Šebo believes that it is the “design of the product” that matters.

He explained: “If you design your pension scheme in a way that is forcing your pension providers to invest in bonds, they will do so. When you look closely at the design of the PEPP product, when you look closely at the design of [Sweden’s] AP7 Såfa, you will understand that these kinds of products will, in the future, perform better than other funds.

“It is because of the design, it is not because of the ability of investment managers to be able to choose a better-performing investment, it is a matter of the design,” he said.

For the PEPP to be a success elsewhere in Europe, Šebo believes that a “friendly environment” needs to be created.

“The PEPP does not have the same conditions as other national long-term or pension products. We can say that in many countries, the PEPP is facing a really unfriendly environment. So, our recommendation is to remove PEPP discrimination and implement a level playing field in the taxation of PEPP products. They have to compete on the same level playing field,” he said.

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