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IPE special report May 2018

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EFAMA study backs life-cycle model for PEPP default option

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A study commissioned by the European Fund and Asset Management Association (EFAMA) has recommended adopting life-cycle investment strategies as a default option for the pan-European personal pension product (PEPP).

EFAMA said the study – carried out by the SDA Bocconi School of Management in Milan, Italy – concluded that the use of life-cycle strategies as the default investment option for the PEPP would be “economically desirable” for consumers.

They would benefit from superior returns and comparatively low risk compared with bonds over a long-term investment horizon, the association reported.

It said the study showed that life-cycle strategies ensured that “99.9% of the savers end up with an accumulated pension wealth greater than the inflation-adjusted capital invested, under both a 40- and 20-year accumulation period”.

The study also illustrated the advantages of life-cycle investment solutions in terms of risk management and performance enhancement, according to Efama.

One of the main debates surrounding the PEPP is whether it should offer a default option with a financial guarantee or whether the default option could rely on a life-cycle approach to protect savings.

Opponents of the guarantee option have argued that it was expensive and lowered returns, and would undermine the potential success of the PEPP.

“Our study, which belongs to [the emerging household finance] area of research, aims at contributing to the current debate on the type of default option that should offered by a pan-European personal pension product,” said Claudio Tebaldi, professor at the SDA Bocconi School of Management and one of the authors of the study.

William Nott, EFAMA president, added: “The Bocconi study confirms that life-cycle investment strategies are a powerful tool for delivering high real rates of return and managing risks, not just investment risk but also inflation risk. We strongly believe that these strategies should qualify as a default option for the PEPP.” 

The European Commission’s proposal for a PEPP did not explicitly refer to a guarantee, instead saying that a default investment option needed to ensure “capital protection”.

The European Parliament’s Economic and Monetary Affairs Committee is currently debating the PEPP. Dutch MEP Sophie in ‘t Veld, who is leading the review, has said the regulation should specify the risk-mitigation techniques, including the definition of ‘capital protection’ for a default option.

The Bocconi study can be found here

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