The debate on the European Commission’s pan-European personal pension (PEPP) proposal centres on whether guarantees should be included in the default option. Necessary protection for European savers or an unwanted provision that will damage future pension income?

Europe’s asset management industry is lobbying against any mandatory guaranteed default option in the third-pillar PEPP proposal. 

Indeed, the definition and nature of the default option is by far the most important issue being debated in Brussels when it comes to PEPP, according to Bernard Delbecque, economic and research director at the European Fund & Asset Managers Association. 

Delbeque accepts that reaching a decision on the default option will not be easy in the face of potential political opposition, not least from the centre-left, in the European Parliament. 

The European Fund and Asset Management Association (EFAMA) contends that a mandatory guarantee option in PEPP would prevent all but insurers from entering the system. The association says it should be up to PEPP providers to decide whether they want to offer life-cycle investment strategies or “strategies with minimum return guarantees as a default option”. 

A study* commissioned by EFAMA from Bocconi University in Milan supports life-cycle strategies. The paper states: “Life-cycle strategies allow 95% of savers to accumulate a level of pension wealth between 1.7 and 2.4 times greater than the level of their contributions, depending on the strategy. And 50% of savers can expect a pension wealth at least 4.4 times greater.” 

It continues: “Life-cycle strategies ensure that 99.9% of the savers will end up with a pension accumulated wealth greater than the inflation-adjusted capital invested, under both a 40- and 20-year accumulations period.” 

Overall, PensionsEurope, whose membership represents about €4trn in assets, favours flexibility. Simone Miotto, senior policy adviser, says this is so PEPPs can accommodate different business models to encourage provider uptake. 


EU 25-59-year-olds with long-term pension savings

On default option guarantees, PensionsEurope takes a similar line to EFAMA. It says there should be a default option allowing providers to include a capital guarantee or other risk-mitigation strategies, such as a life-cycle strategy. 

Miotto notes that European pension savings are concentrated in countries like the UK and the Netherlands. Boosting pension savings overall by channelling assets from other sources, such as bank savings and putting them to work in longer-term investments, would be beneficial overall. 

Other organisations are generally supportive of PEPP. The consumer-interest lobby, Better Finance, bases its positive view on the need for an effective European third pillar, saying EU citizens will have to increase private savings in the face of a global pensions gap forecast to reach $400trn (€322trn) by 2050.

Insurance Europe notes that only 27% of the EU population aged 25 to 59 saves using financial products with a long-term pension objective. 

Josina Kamerling, head of regulatory outreach for the EMEA region for the CFA Institute, supports the need for PEPP owing to the “very fragmented EU pension landscape” built along national lines. 

For his part, Paul Fox, research and advocacy officer at Finance Watch, a public interest association, writes: “The PEPP proposal will not address the fundamental issues with pension systems in the EU.”

Lionel Martellini, director of EDHEC-Risk Institute in Nice, notes that state pension systems are weakening in most EU countries. Funded systems, as in the UK, are in deficit, while pay-as-you-go schemes, as in France, are being undermined by the severe decrease in the ratio of workers to retirees. 

Yet he cautions against a debate that focuses only on the merits of guarantees versus life-cycle options when neither provides for income in retirement. Replacement income, not absolute wealth, should be the focus, he stresses.

“More generally, individuals investing for retirement should not have to make a choice between downside risk protection (expected to be found in guaranteed products) and upside performance (expected to be found in life-cycle strategies),” Martellini says. “In particular, academic research has documented that new generation, risk-managed life-cycle funds with a focus on replacement income can potentially allow for both benefits.”

As for the PEPP position among EU national governments, it seems to be early days. According to a 2017 paper, the European Council was concentrating on generalities, but with a positive tone.

*‘Consumer protection and the design of the default option of a pan-European Personal Pensions Product’, available at