At first sight, the benefits of the European Commission’s Pan European Personal Pension (PEPP) regulation proposal seem clear – for pension savers, providers, and for Europe’s economy as a whole. Indeed, approving comments flooded in immediately after the official publication of the proposal in June. But it did not take long for commentators to point out the considerable hurdles.
Indeed, the Commission has been frank about the hurdles. Speaking immediately prior to the launch, Nathalie Berger, head of the Commission’s insurance and pensions unit, said there was a reluctance to discuss the tax implications. At the same time, John Berrigan, a deputy director-general of the European Commission, described taxation as the biggest challenge. Both are aware that taxation rules, including beneficial tax treatment of pension arrangements, are jealously guarded by member state governments under treaty obligations.
At a public hearing in October 2016, Carolyn Jones, Fidelity International’s pension specialist, said achieving the required relaxation of national tax strictures would be “a miracle”. Fast forward to June, and Berger herself described the necessary changes as in “need [of] a lot of negotiation”. She outlined that the Commission’s proposal would include a recommendation to encourage the member states to apply the necessary tax relief.
The official recommendation hardly amounts to much: “Member states are encouraged to grant PEPPs… the same tax relief as the one granted to national PPPs [personal pension products], once these PEPPs are launched on the personal pension market, even in those cases where the PEPPs’ product features do not match all the national criteria required by the member state to grant tax relief to PPPs”.
It continues: “Where member states have more than one type of PPP, they are encouraged to give PEPPs the most favourable tax treatment available to their PPPs.” It was greeted by one informed source as a “triumph of optimism over experience”.
Ominously, the Commission appears to have been playing down what it clearly confronts – media questions on taxation were not included in a web video clip of the press launch. A four-page promotional document pedals softly, allocating only 39 words to the topic.
Overall, the post-launch reaction from numerous sources is a consistent tone of measured disappointment, qualified by a desire for the product to be successful. The consensus is that the Commission faces an uphill battle, if not an impossible task, in achieving any agreement on tax from the EU’s 27 national governments. It is not the only problem but it is the gravest.
James Walsh, EU and international policy lead at the UK’s Pensions and Lifetime Savings Association, says: “I’ve been discussing this with pensions associations all over Europe and they pretty well all see the tax issue as important.” Walsh, EU and international policy lead at the PLSA, adds that the PEPP proposal is “welcome… if only because it intends to get people saving more”. Perhaps understating the situation, he judges that it is “not at all clear how it will be developed”.
Darker shadows are cast by Mark Dowsey, a senior consultant at Willis Towers Watson. If details are key, Dowsey provides an abundance. On tax, he fears that the proposal could be shunned as a move towards pan-EU tax harmonisation.
Aside from that, Dowsey says a handful of countries working together could succeed, although PEPP would then not be a pan-EU scheme. This sentiment is echoed by Gert Kloosterboer, spokesman for the Dutch Pension Federation. He says PEPP “could be suitable in countries with less developed plans”. But he dismisses its relevance to the Netherlands, pointing to the nation’s well-developed second and third-pillar systems.
Dowsey notes that restrictions are imposed where accrued benefits are transferred across borders. Often these can impose conditions on the ‘receiving’ arrangement – the one domiciled in a country away from where the benefits were accrued. “These measures have been developed over time to protect the country’s tax base,” Dowsey says.
Differences in approaches to taxation mean a member state could grant beneficial tax treatment at the accumulation phase, with no ability to recoup it later on if the saver transfers abroad.
Resaver, the pan-European pension start-up for academic researchers, came into operation early in 2017 with the first contributions in May. Martino Braico, senior manager at Previnet, which handles taxation issues for Resaver, says PEPP products could possibly, but not easily, be able to comply with different local requirements, including tax. He does not expect local tax authorities to change their regulations purely for the sake of PEPP.
Providers will have to design a PEPP product that features compartments for all member states within three years of launch. Presumably this means each compartment must meet whatever domestic requirements are necessary to obtain beneficial tax treatment, according to Dowsey, although this is not entirely clear. Walsh emphasises the need for universal compartments to avoid overstretch if a provider covers only two or three countries in practice.
According to the proposal, PEPP providers can make payments to savers in the form of annuities, lump sum, drawdown payments, or a combination of two or more of these. Dowsey is not convinced member states will support this suggestion.
Like others, PensionsEurope has issued a cautious welcome to the proposal. But it is hard to discern enthusiasm from CEO Matti Leppälä’s comment: “We underline that the decision to [take up] the Commission recommendation will exclusively remain in the hands of each member state”.
According to Bernard Delbecque, senior director for economics and research at the European Fund and Asset Management Association, the Commission had no choice but to leave the tax treatment of the PEPP to member states. He says this may facilitate the success of the PEPP: “This gives each member states the authority to support, or not, the PEPP at national level.”
Historically, wheel-lock guns would not fire if set at half cock. One authoritative source agrees that the tax question means PEPP is indeed starting at “half cock”. Overall, the big picture on PEPP remains negative.