FECIF Editorial

The EU Commission has presented its draft amendment to Regulation (EU) 2019/1238 on a pan-European personal pension product (PEPP).
Any reform project should start with a clear-eyed, honest assessment of the current situation. That kind of straightforwardness is the foundation of credibility in politics today.

This is precisely where the EU Commission still falls short of what the public can reasonably expect. In 2019, it introduced a rulebook for distributing a pan-European pension product with lofty ambitions. Six years later, a reality check is sobering: only two niche providers in Slovakia and Cyprus currently offer a PEPP. Is that not, plainly, a failure?

In the Commission’s more gentle wording, this is merely an interim outcome: “The PEPP has not yet achieved the expected commercial success.”
Yet, contrary to the most obvious conclusion, responsibility is not attributed to the design flaws that many market participants warned would make failure likely. Instead, the Commission states: “The framework created by the PEPP Regulation has not been sufficiently successful commercially, mainly due to strong competition from national products and certain restrictive features of the PEPP Regulation.”

At that point, it seems fair to ask—without any malice—whether a PEPP was ever truly necessary in the first place, given the “strong competition from national products.” The EU Commission does not appear to reject that question outright. Still, it remains firmly in the saddle of regulatory thinking and now presents its reform proposal as the remedy. Unsurprisingly, the answer is more regulation. What is less helpful is that this is not stated plainly; instead, the wolf approaches in sheep’s clothing.

Anyone who hoped the Commission’s draft reform of the pan-European pension product (PEPP) would be a convincing step toward cutting red tape will likely be disappointed. In practice, the draft lays the groundwork for additional, hard-to-navigate bureaucracy.
Because the draft signals the abolition of a rigid cost cap for PEPPs, some initial reactions from the insurance and distribution sector have already been favorable. A closer reading of the proposal, however, is likely to prompt a more cautious reassessment.

In detail:

1. The EU Commission wants to define “independent advice” on its own

   By sidestepping the parliamentary processes for the relevant directives—especially the IDD—the Commission intends to use the PEPP Regulation to define “independent advice” for insurance mediation as well. It does so by inserting a new point 34 into the definitions in Article 2 of the PEPP Regulation, as follows:

   “Independent advice” means advice where the PEPP provider or PEPP distributor:
   a) evaluates a sufficiently large number of personal pension products available on the market, which are sufficiently diversified in terms of their nature and product providers to ensure that the objectives of the potential PEPP saver can be adequately met, and does not limit itself to personal pension products offered or provided by companies that have close links with the PEPP provider or PEPP distributor;
   b) does not accept any fees, commissions, or other monetary or non-monetary benefits paid or granted by third parties or on behalf of third parties in connection with the provision of the service to potential PEPP savers.

   It is apparent that the Commission is attempting to get ahead of the current debate within the Retail Investment Strategy. There, the question is being discussed whether “independent advice” in insurance mediation should be restricted exclusively to fee-based advice. No consensus has emerged so far. The Commission is now trying, via the PEPP Regulation, to define “independent advice”—a concept that, if it needs defining at all, should be defined in a directive—through an administrative shortcut. This likely reflects the fact that, in the RIS debate, it has met resistance not only in the European Parliament but also, in particular, from national representatives.
   
   

2. No advice on basic PEPPs from insurance and financial investment intermediaries

   The Commission’s approach to the so-called basic PEPP is, in substance, difficult to understand. Under the current rules, offering a basic PEPP is the gateway that allows the same provider to offer other product variants.

   This obligation is now to be abolished, but that does not truly simplify anything. In the future, basic PEPPs are to be designed exclusively for non-advised business. Distribution is explicitly intended to take place without advice. The proposal clearly states there is no obligation to provide advice before concluding a basic PEPP.

   Moreover, providing advice at the point of sale is made even more difficult by requiring that any such advice may only be given on an “independent basis.” In practice, this means it must always rely on a comprehensive market overview comparing different PEPP providers and must not be remunerated by commission—only by a fee paid by the interested party.

   This effectively excludes future advice on basic PEPP sales by insurers’ tied-agent networks or by multi-tied agents. Commission-based insurance brokers and financial investment intermediaries would likewise be unable to provide advice on basic PEPPs going forward.
   As a consequence, insurers and fund companies will have little incentive to develop a basic PEPP—because, unlike the Commission apparently, they know that retirement products are not genuinely embraced without advice.

   Given the complexity of retirement planning, every consumer in the EU would be well advised to make such decisions on the basis of sound guidance. Only then can the various elements—such as in Germany the interplay of statutory pensions, occupational and private provision, the desire to acquire property, protection of dependents, protection of one’s own earning capacity, and the management of accumulated assets—be aligned into a coherent overall plan. Broad retirement provision is not well served by advice-free online-platform business. It does not take a clairvoyant to foresee that, under these conditions, the basic PEPP is headed for the same fate as today’s virtually non-existent PEPP offering.
   
   

3. New technical regulatory standards for risk mitigation strategies

   The revision once again suggests that the Commission continues to assume that it—and the supervisory authorities—are the better product designers, and it again signals a deep mistrust in the private sector’s ability to solve problems effectively.

   A new definition introduces the term “lifecycle investment strategy.” It “refers to an investment strategy in which the risk associated with the investments is adjusted according to a predetermined glide path in order to reduce investment risk and achieve an appropriate level of long-term valuation, taking into account the person's age or retirement date and, where applicable, the payout profile of the product, in order to minimize the risk of large losses.” (Article 1(2), sentence 1, point 35 new).

   Unsurprisingly, this definition is followed by the authorization to codify requirements and controls via supervisory technical standards. The new Article 46(3) empowers EIOPA to set minimum quality criteria, in the form of technical regulatory standards, for how these risk-mitigation techniques are to be implemented. EIOPA is to deliver these technical standards six months after the regulation enters into force.

   This is another clear indication that the draft does not reduce bureaucracy. On the contrary, it contains further mandates for technical standards and thus opens the door to more layers of regulation.
   
   

4. No more cost caps—so everything is fine?

   One might assume that removing the obligation to offer a basic PEPP would create more freedom in product design, and that providers would enthusiastically develop more complex PEPPs, for which commission-based distribution could be possible and a cost cap would not apply. That expectation would be optimistic.

   In fact, the Commission is already anticipating the outcomes of the RIS trilogue in the regulation. The newly drafted Article 25 requires PEPP providers to use “the relevant regulatory benchmarks” to assess value for money as part of their product approval process. The Commission is also empowered to adopt further delegated acts to define product criteria and benchmarks for PEPP products.

   The Commission appears firmly convinced that it will be the authority—together with EIOPA—that sets specific value-for-money benchmarks for insurance-based investment products in the future. Anyone who believes the rigid cost cap that has constrained basic PEPP development to date will disappear without replacement is mistaken. Rather, the new draft grants the Commission the ability to set cost limits via benchmarks for all PEPP products. How this will be determined will, to a large extent, slip out of meaningful political control.

   Under the banner of abolishing apparent cost limits, we are witnessing a familiar move from one regulatory constraint into another—accompanied by an overall increase in bureaucracy.

   For these reasons, this draft regulation should not be approved. The EU Commission’s handling of the matter is, unfortunately, more than open to criticism. In 2019, it chose an overly bureaucratic approach in the PEPP Regulation, and its likely failure was anticipated by market participants. The new proposal continues that misguided approach—simply by different means.