PEPP: no straightforward route
Some entities will not be eligible to offer PEPP products in Bulgaria, which looks like a recipe for market confusion
A small child cries in the street. A gentleman passing by walks up to the child to understand why. The child says she has lost a €1 coin. So the gentleman hands a €1 coin to the poor little girl. To his surprise, she starts crying even louder. It turns out that, according to the girl, if she had not lost her own €1 coin she would have had €2 now.
Financial anecdotes in Bulgaria – one of the poorest countries in Europe – are not necessarily funny. Neither are the latest pan-European developments in pensions.
The privately managed pension market in Bulgaria is estimated at €6.8bn with 4.7m individual members at 31 December 2018. It comprises:
● Two statutory vehicles, mandated by law and treated as pillar 1 bis – that is, mandatory universal pension funds (MUPF) and mandatory occupational pension funds (MOPF)
● Two voluntary vehicles: voluntary pension funds (VPF) and voluntary pension funds with occupational schemes (VPFOS)
By virtue of the applicable national law, pension funds (PFs) are established and managed in Bulgaria only by pension companies. Pension companies are private shareholder entities. They are allowed to manage only the assets of the PFs they have established. PFs are administered by pension company staff and represented by pension company management bodies.
PFs and pension companies are separate legal entities with clear segregation of PF members’ money and shareholders’ assets. Both PF and the pension company are independent of a sponsoring undertaking. No other financial provider may use the designation of ‘pension’ in their products. PFs operate as fully-funded, defined contribution (DC), individual capitalisation accounts.
The mandatory vehicles in Bulgaria, established at the beginning of this millennium, followed the pillar 1 bis approach. They account for 91.67% of assets under management and 86.38% of the members. MUPFs cover every working individual born after 1959. MOPFs cover only the early retirement in hazardous occupations.
The VPF vehicle in Bulgaria, established in 1994, accounts for 8.22% of the assets under management and 13.44% of the members. It offers an individual non-occupational pension product subscribed to voluntarily by a PF member in view of retirement. Every person aged 16 and over may participate, regardless of nationality and residence. Although local VPFs offer personal pension products, they are not registered and authorised in accordance with the IORP II Directive. Thus, they might not qualify for PEPP providers.
There is a local vehicle within the scope of IORP II Directive. That is the VPFOS, which is reported to have 0.11% of the assets under management and 0 .18% of the members. Although local VPFOS are within the scope of IORP II directive, and all their assets and liabilities are legally ring-fenced, without any possibility to transfer them to the other retirement provision business of the managing pension company, VPFOS may not be eligible for PEPP providers either. The reason is that by virtue of the applicable national law, members may not buy a personal pension product via the VPFOS vehicle because the occupational scheme is legally based on a collective agreement between employers and their employees.
In brief, the Bulgarian legal vehicle registered and authorised under the IORP II Directive is designed for collective occupational schemes and may not offer personal pension products pursuant to national law, whereas the entity offering personal pension products in Bulgaria does not fall under IORP II.
Since the 1990s, Bulgaria (along with the other central and eastern European countries) has been criticised for allowing a ‘non-European’ model of privately managed pension funds with DC individual capitalisation within the national pension system. With the PEPP proposal, the European Commission openly promotes such national pension policies, hoping for their adoption in a free European market. Such an EU legislative evolution has to overcome the already established models in a free market situation. The EU legislator would find it safer, logical and more convenient if PEPP providers that operate under EU legislation were used.
At the same time, while PEPP is being established as a new vehicle (because it has not existed at EU level so far), it may well be that there are already specialised providers of national prototypes. Moreover, national private pension solutions might have served as inspiration for the European legislators. Some
PEPP features are easily traced in the VPF vehicle in Bulgaria regarding asset investment and risk management; depositary safekeeping of assets; information to members and supervisory reporting; switching among providers and portability; free choice of pay-out options and so on.
Therefore, if national providers of traditional private pensions, whose only scope of business activity is supplementary retirement provision, turn out to be outside the range of eligible PEPP providers, competition among more providers might remain unattainable
There is also uncertainty about the adequate and sustainable behaviour of individual investors owing to possible negative market signals: if PEPP customers are to be prohibited from relying on a range of providers including their local VPF, which have been offering private pensions for years, speculation about VPFs is inevitable, and in no way will this contribute to trust in the pension system as a whole, including the new PEPP.
“The PEPP regulation is the biggest and most ambitious cross-border EU project in the sphere of retirement provision”
Moreover, in the midst of world financial turbulence and unrest, no VPF has gone bankrupt in Bulgaria ever since their establishment in 1994. Unfortunately, this has not been the case with other financial institutions deemed to be eligible PEPP providers.
Local VPF providers are not necessarily national, as all the large pension companies managing VPFs in Bulgaria are owned by renowned international financial groups. Economies of scale and pooling of assets in offering PEPP will make the product more efficient for both the customer and provider.
The peculiar point about poor CEE markets is that customers may not be able to afford to keep two sponsoring pockets – one for the local private pension and one for PEPP. Without an increase in the household disposable income, reallocation of savings from local private pension to PEPP is more probable than an immediate increase of savings into the new product. Some international groups may be agile enough to keep those reallocation flows within their financial entities. Others might see their private pension customers reallocating their long-term pension savings to PEPP providers belonging to other international groups.
The PEPP regulation is the biggest and most ambitious cross-border EU project in the sphere of retirement provision, which will definitely pave the way for a ‘European pension union’. By the time it happens, one should not be perplexed by complaints about PEPP coming from those who are not soothed by substitutes because they think that if their own local private pension is not lost, they would have two personal pension vehicles after the advent of PEPP.
Nickolai Slavchev is pension expert for the National Tripartite Council Social Commission in Bulgaria