Pan-European personal pension product requires improvement

Funded pensions can provide both a retirement income for EU citizens and capital for long-term investments by financial institutions.

Some EU member states have strong funded pension pillars, and savers can also use the pan-European personal pension product (PEPP). 

In September 2024, EIOPA published a paper on the future of the PEPP, and the savings product has also come up in reports about the future of the EU internal market and the realisation of the Savings and Investments Union (SIU), currently known as the Capital Markets Union. 

The PEPP has two goals. The first is to close the pension gap for EU citizens who do not have access to occupational pensions or other personal pension products. The second is to encourage cross-border provision and portability of pension products within the EU. Neither of these goals has been achieved and there has been limited uptake of the PEPP.

Obstacles for pension savings 

There are a few reasons why the PEPP has been unsuccessful, not all of them related to the PEPP specifically. Pension products are plagued by behavioural myopia, resulting in individuals not saving enough for retirement if not stimulated to do so. In that respect, principle 15 of the European Pillar of Social Rights is ignored, which stipulates that workers and the self-employed in retirement have the right to a pension commensurate to their contributions and ensuring an adequate income. 

Other challenges for personal pension products are the increasing cost of living and financial illiteracy. Governments can encourage the uptake of personal pension products by tax incentives but this has not been implemented for the PEPP in every member state.

But the PEPP also has inherent design flaws that stand in the way of its success: 

• It has extensive requirements which prevents it from being a simple, cost-effective personal pension product. 
• The basic PEPP has a fee cap of 1% of the accumulated capital per year. This cap includes the guarantee that a PEPP saver can recoup the capital invested, and includes advice to the saver. Guarantees and advice are expensive, especially for small potential PEPP providers that cannot exploit economies of scale.
• The regulation requires providers to offer PEPP products in at least two member states and also has extensive information document requirements, which all add to the operating costs. 

As EIOPA has pointed out, the combination of requirements makes it difficult to design a commercially viable product in practice. 

There is strong case to be made for more funded pensions in the EU in which the PEPP plays a role. Many EU retirees are dependent on state-sponsored pay-as-you-go pension schemes. 

Funded pensions can provide capital for more long-term investments by financial institutions. The PEPP could therefore contribute to the establishment of the SIU and the reinforcement of the EU internal market. In March 2024, the Eurogroup invited member states to decide whether the PEPP should be improved. A month later, the Letta report noted that “based upon an objective assessment of its underwhelming performance, simplifying and upgrading of the PEPP might be a viable option for the future”. At the same time, the Draghi report states that “capital markets are also undersupplied with long-term capital relative to other major economies, owing largely to the underdevelopment of pension funds”.

Takeaways from EIOPA paper

The EIOPA proposals (see box) could breathe new life into EU supplementary pensions. Many of the measures make sense, but the proposed integration of occupational and personal pensions into one PEPP product raises more questions than it answers. In particular, it is difficult to see how the combination of an occupational and a personal PEPP should be structured, for example, in the form of separate sub-accounts for both types of pensions. Additionally, employers can already contribute to personal pensions, including PEPPs. We wonder what results EIOPA envisages with the proposed integration. 

At first glance, the integration of occupational and personal pensions might be a solution for countries with small, funded second and third-pillar pensions, but for other states, especially ones with developed occupational pension systems, this proposal seems to have limited added value. An occupational PEPP should complement existing occupational pension schemes, not replace them. 

The best improvements depend on national measures

EIOPA does not mention the volume of the premiums paid into PEPP products. This is surprising because the premiums are likely to be essential to achieve scale and impact. Even if the PEPP regulation is well designed, we foresee that material effects cannot be reached when the premium level paid by the consumer or, in the case of an occupational PEPP, the employer, is too low. In the case of IORPs, for example, social partners play an important role in setting adequate pension premiums to achieve adequate pension outcomes. 

Auto-enrolment as proposed by EIOPA is a powerful tool with a proven track record that can stimulate individuals to save more for their pension. Nonetheless, it is unclear if there is a sufficient legal base for the ambitious idea of auto-enrolment for every EU citizen. More research in this respect is necessary. 

Member states could also determine what tax incentives would work in their national contexts and if they can be designed to be compatible across the EU, or whether national solutions would result in more tax savings. If a common approach to a tax incentive could be agreed, the design of a PEPP could be more harmonised. 

EIOPA’s PEPP paper is a good first step, as is the consultation with external stakeholders. The planned review of the PEPP regulation before 2027 is also welcomed, but an earlier evaluation and review should be an option. Perhaps the European Commission could take the initiative. 

It is not solely up to EU institutions to increase funded pension provision for European citizens. Member states should provide crucial incentives for their citizens to start saving for their retirement.

Wilfried Mulder and Ruben Laros are senior strategic policy advisers on policy and public affairs at APG