EU-level pension funds would bring benefits of scale, increase pension funding and improve labour mobility. Having a uniform set of rules is nice in theory, but the practicalities are proving difficult. The pan-European personal pension product (PEPP) has taken a step forward, but progress could be limited.
Only 27% of Europeans aged between 25 and 59 years old have enrolled in a pension product, say the European Commission. Seeing as there are serious doubts about the long term viability of many state-run retirement schemes, many see a looming social crisis.
If pensions could be organised on a European rather than a national basis, pooling assets would cut costs and boost efficiency. There would also be an increase in competition and choice, thus making saving for old age more attractive. This is just the formula which has worked for funds.
Another advantage of the PEPP is savers would be able to switch providers more easily, either domestically or across borders. This could be after a minimum of five years from taking out the contract or from the most recent switch, or more frequently if the provider allows. There would also be a cap on the switching fee. As well as increasing choice, it would make it easier for savers if they move to another member state.
This was the inspiration behind the 2017 PEPP plan from the European Commission, and this took a step closer to reality on 13 February, when the European Parliament and member states’ civil servants reached agreement on a text. The next step is approval by the member states’ politicians in the Council of Ministers and then again by the parliament, with the aim of having this all agreed before European elections in May.
However, there are signs that even the commission are downplaying the potential impact. “We regret that the portability of the PEPP and the role of EIOPA [European Insurance and Occupational Pensions Authority] were weakened,” said the commissioner responsible for financial services, Valdis Dombrovskis. He characterised the agreement as “an important first step towards building a true pan-European market for personal pension products.”
Jyrki Katainen, the commissioner responsible for jobs, growth, investment and competitiveness, was more upbeat, calling it “a major milestone on the road to addressing pension gaps and demographic challenges.”
Tax and the regulator’s role had been sticking points between the council and the parliament for some months. Discussions began in October 2018 and they struggled to reach a compromise. A key issue was who should be responsible for granting access to the market for PEPPs.
The parliament pushed for EIOPA to have the lead role, but it was reported that a majority of member states wanted local regulators have the final say. Many were motivated by the desire to protect their domestic pension system. They cited the worry of providers able to offer PEPPs from countries with weak regulatory regimes.