Pan-European personal pension products (PEPPs) were set to revolutionise the cross-border and personal pension markets. However, in the words of the European Insurance and Occupational Pensions Authority (EIOPA), the PEPP “has not yet taken off.” After many years in development, why hasn’t the PEPP been an immediate success? And does it still have the potential?

The PEPP is a voluntary third-pillar personal pension product designed as a new option for EU citizens to save for retirement on top of any state or occupational pension savings they may have. Its key selling point is its portability – savers are able to keep saving in the same product even when they change residence in the EU.

Regulations to introduce PEPPs were adopted by the European Parliament in April 2019, with member states given until March 2022 to transpose the legislation, paving the way for providers to launch the products. Yet a year and a half since the March 2022 deadline, there is just one registered PEPP provider on EIOPA’s register – a Slovakian company called Finax.

Yet to bite

A spokesperson for EIOPA admits that industry up-take is still moderate, which could be explained by the fact that the product is new.

“There may also be challenges on the demand side for now. The current cost of living crisis affects many people, who may already have had problems saving for retirement before high inflation. Some may have less disposable income and may have to use their retirement savings or cut pension contributions and therefore might not be able to invest in additional products,” EIOPA’s spokesperson says.

There are deeper issues at play, however, beyond a cost-of-living crisis. Firstly, there are many member states that are still yet to adopt the legislation altogether, despite the deadline passing in March 2022. This includes the country at the very heart of the EU, Belgium, as well as Greece, Portugal and Bulgaria, among others.

The delay by so many countries in adopting the legislation is clearly a huge contributing factor to a lack of uptake. In other instances when member states have breached their deadline for adopting new EU legislation, action has been taken against them by the European Commission (EC). For example, in April 2019 the commission launched infringement proceedings against 17 member states for their failure to transpose the IORP II Directive by the January 2019 deadline.

Despite more time lapsing since the PEPP regulation deadline, the EC is yet to take any strong action but it is “following up on implementation by member states together with EIOPA”.

CBBA-Europe secretary general, Francesco Briganti, thinks that the reason for a gentler push so far is because the EC is aware that the PEPP was not really welcome in some jurisdictions. That being said, the EC has confirmed to European Pensions that, if needed, infringement action could be taken next spring.

“Next spring a review of the PEPP will give us the opportunity to see the full picture and then to take action (infringement) where necessary to remove barriers and ensure that PEPP has its place in the market. This is an important part of the CMU agenda to foster more efficient personal pension savings for EU citizens,” a spokesperson for the EC says.

Briganti is clear that this delay is a big contributing factor to why PEPPs have not yet been a success so far. “We have to be aware of the fact that member states have been quite late in clarifying their treatment of PEPPs in their own countries, which basically delayed a lot of development,” he says.

Secondly, EIOPA’s spokesperson highlights that the tax treatments of the PEPP vary between those member states that have adopted the legislation. “In many countries, the PEPP is not treated the same as other personal pension products and is clearly at a disadvantage from a consumer perspective,” EIOPA’s spokesperson notes.

Briganti highlights a another “huge obstacle” with the regulation – the fee cap. Existing regulation sets it at 1 per cent, which must include advice upon take up of the product. While this may be feasible for digital providers, it is proving to be a turn off for insurance firms.

“In their opinion, the fee cap is so low that a local national pension product is much more interesting for them in turns of gains and returns. ‘Why should we create something that basically does not make us money like the PEPP’. This is something that insurers say a lot because the fee cap is also meant to include mandatory advice,” Briganti explains.

Love at first sight

While the PEPP has had a slow start overall, the company offering them could not be more passionate about the product, offering a glimpse of its potential. For its CEO, Juraj Hrbatý, it was love at first sight.

“From the moment that the legislation was approved back in 2019, I really loved the legislation. I’d always seen the market, the pension market, as being fragmented and not transparent in a way that makes it very tough to understand.”

Hrbatý empathised with the EU’s mobile workers who find it near impossible to source information on pensions in their own language, or in English. He also knew that mobile workers often end up with many smaller pensions from several different countries and saw an opportunity to offer an alternative solution.

He was also drawn to the fact that the regulation covered the product, rather than it being included within a sector-specific directive, such as the IORP II Directive that regulates the European pensions sector. “I thought I love the opportunity that it gives to brokerage companies and not only pension companies. I love that the regulation is for the product, not the sector.”

Hrbatý saw the PEPP as offering the stability that the pensions sector needed, highlighting the frequent reforms that are seen in pension markets across Europe.

“There are so many changes, so many things happening and I said, finally you can have one legislatively very stable product… There are a lot of things, a lot of positive things for savers. I said, okay, I want to do that,” he explains.

“We were preparing to launch the PEPP for two years before the law came into force, so it’s not that we started only after March 2022. We went to a sandbox programme with our regulator. We are happy that our regulator in this space is pretty progressive. We’ve also been very lucky that Slovakia has been one of the first countries to adopt the regulation. I think we were the third country – in the top five countries that adopted the regulation.”

This approach meant that once the regulation came into effect, Finax was able to apply to be a PEPP provider immediately. The company began with one country, its native Slovakia, and launched its first PEPP in September 2022. Finax then moved into other markets, including Czech Republic, Croatia and most recently, Poland.

“We are extremely digital and we already operate in all those markets with our standard investment products, which is a robo-advisory service. To get a license for the other markets it took around three months to prepare the paperwork, prepare the key information documents and everything else.”

Despite its preparation, Finax has also been affected by the delays in countries adopting the PEPP regulation. “The reason we have only just launched in Poland now is because the country only adopted the legislation in September 2023,” Hrbatý says. He also has plans to launch the product in Hungary and Romania – both markets that the firm currently operates in.

“We would love to start operating in western markets. We are already taking some steps but this would require much more capital, so it would be much more capital intensive. We would be looking for a partner to launch it,” he says.

His ultimate goal for the company is to operate in all 27 member states and Finax has already carried out extensive market research of each European country, seen by European Pensions.

Hrbatý notes, however, that the tax treatment applied by each member state has a big impact on the product’s future potential in that country.

“Not every market offers tax incentives for PEPP that align with what they offer for their third pillar products. The legislation only suggests that countries adopt the same tax incentives that they apply for their local pension products.

“There are countries, for example, like the Netherlands, France, Ireland and many others that have adopted it in the same way but then there are countries like Germany and Austria where there are no incentives for PEPP at all.”

In terms of the company’s future strategy in Western Europe, Hrbatý believes Finax needs a strong partner behind it to entice western savers. Another option for the company is to offer a packaged IT solution that could be sold to western European companies wanting to launch a PEPP.

“They would bring their name and their trust and that’s how we could build a bigger client base on the western European markets,” he says.

The 1 per cent fee cap is something many insurance firms would like to see increased but for Finax, a digital company, it is not a problem. Finax offers the product with a fee of 0.6 per cent plus VAT (0.72 per cent). “We offer two life-cycle strategies, the standard basic PEPP is fully invested in stocks then 10 years before retirement this is de-risked,” he explains.

Where Finax has had great success with the PEPP is in offering the product to employers. One of those companies that has chosen to do this is the automotive parts manufacturer, Continental. It has decided to offer Finax’s PEPP to its employees in Slovakia.

“It really likes the scheme because it has 110,000 employees in around 20 countries in the European Union. Continental sees PEPP as an opportunity to unite this pension scheme among their clients. This way, Continental doesn’t need to think, okay, what pension scheme is in Poland, in Slovakia, or which pension scheme is the best in Germany. Eventually, it could have only one scheme that will be suitable for all employees. If its employees change their country of work, it can still contribute to the same plan. There is no need for the employer to study what’s going on in the other country. It’s extremely simple.”

This has led to additional business for Finax as many of those employees have opened up other investment accounts or accounts for their children. “It’s actually helped [Continental’s] employees with their financial stability, which is also really interesting.”

Future potential

EIOPA says it cannot disclose the current number of applications for registering a PEPP, but according to Briganti there are a number of operators in Europe that are working towards the creation of a PEPP.

“If they don’t have any problems with the local legislation, they will officially launch the PEPP in the near future. There is an interest and there are some operators who are working on this,” Briganti says, confirming that they are in western European markets.

“I know other operators who tried to establish a PEPP but [due to the delay in transposition] they were really frustrated because they saw that there was still uncertainty on the local jurisdiction… so they decided to postpone the creation of PEPPs because they didn’t have the legal answers that they were looking for.”

Hrbatý, welcomes competition as he believes it would give the product more credibility with savers. He has also heard that operators in countries such as Belgium, Croatia, the Netherlands and Cyprus, are interesting in launching a product.

“I would say it’s just a matter of time. Obviously, it would also help us because currently even people in the markets where we operate ask why if it is so good are you the only provider. But we like to be pioneers and when this market does develop further we will be the ones with the most experience.”

Next year there will be a review of the regulation by the EC, and Briganti believes the fee cap could be included in that.

“Maybe it could be raised a little a bit [up from 1 per cent], that could be a way to remove some obstacles from some operators who are sceptical about PEPP. If the fee cap is higher, maybe some insurers would be interested.”

So far, the PEPP has not reached its potential, but the jury is still out on what the future holds. Briganti concludes: “I think that it is too early to say that it is a total failure. We can’t say that it is a wonderful success but maybe it really is a question of time, of settlement and adjustment of the procedures and the clarification. Maybe we still have to be a little bit more patient before making any conclusions.”

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