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The EU is pro-actively developing Europe-wide pension solutions with a view to supporting multinational companies, pension providers and individual citizens. New EU rules will make setting up and running cross-border occupational pensions funds (IORP) an even more realistic option. The proposed Personal European Pension Plan (PEPP) is an easy and cheap solution for individuals wishing to save.
Things are moving more slowly than hoped, but we are steadily advancing towards a single European market for private and capital-funded pensions. The aim of the EU is to stimulate pension savings across Europe and to mitigate old age poverty. At the same time they want to make it easier for multinationals and pension providers to provide cost-efficient and high quality cross-border solutions, leveraging on the freedom of capital, labor and services in the EU internal market.
State pensions – the so called first pension pillar – are in a challenging situation throughout Europe. They are based on a so-called pay-as-you-go system (PAYG) where the younger members of society pay for the pensioners. In an aging society, this intergenerational solidarity has become less sustainable, which means that private pensions – the second and third pillars – have to be boosted.
Private pensions are usually based on a so-called funded system whereby each individual saves for his or her own old-age pensions by voluntarily supplementing their existing state pension. A large proportion of the future benefits stems from investment gains during the accrual and pay-out phases. Capital-funded pensions are growing substantially as the population keeps aging and EU regulatory initiatives are pro-actively addressing this challenge. Two examples of these initiatives are the Institution for Occupational Retirement Provision (IORP, for the second pillar) and the Personal European Pension Plan (PEPP, for the third pillar).
The European occupational pensions market was created following the introduction of the EU Pensions Directive, back in 2003. This directive has subsequently been updated in 2016. The Directive regulates IORPs and – if they meet the right conditions – issues them with a European passport to operate in the EU single market.
The illustration shows how a cross-border European pension fund functions. On the one hand (left side) there is the pension institution (the IORP) which acts as the legal, governing and financing entity. The IORP is based in a specific member state, the home country, which regulates various aspects including the IORP’s funding and governance structure and acts as the single, lead supervisor.
On the other hand (right side) is the pension product or pension scheme. These schemes vary considerably from one member state to another. For instance the benefits (defined benefit or DB) or the contributions are fixed (defined contribution or DC). The periods in which the premium contributions are paid, the investment rules and the tax incentives may also differ. As such, pension products are not being harmonized across the EU and remain compliant with the regulations in their local, host country.
In practice this IORP Directive functions very well. Around 85 cross-border IORPs have already been established. About 25 of these have been newly launched by multinational employers in order to efficiently manage pension schemes for the local employees of their numerous subsidiaries in a single European pension fund. Moreover, banks, insurers and asset managers are also in the process of setting up cross-border IORPs in order to tap new growth opportunities outside their local markets. The outlook for DC products and efficient life-cycle investment solutions is particularly promising. One of the main aims of the 2016 revised IORP Directive is to support private market parties and early movers.
In addition to savings made via the employer, some people also save personally to enhance their income after retirement. These third pillar pensions are not usually organized via IORPs, but via a bank savings account, a life insurance policy or an investment fund (mutual fund). There is as yet no efficient EU single market for these personal pensions. However, a major EU initiative is underway to also facilitate individual pension saving in future and to increase the internationalization of best practices and market competition among pension providers: the Personal European Pension Plan (PEPP).
The PEPP aims to become a regulated cross-border pension product that can be offered by banks, insurers, asset managers or by IORPs. Individuals will be able to save via dedicated personal pension accounts, which are portable and can be moved from one country or one provider to another.
‘The Personal European Pension Plan stimulates pension savings across Europe’
The product will be based on a DC structure with regular premium contributions and no benefit guarantees. It will be as simple and accessible as possible. The EU will set rules for proper consumer protection via standardized requirements for a range of aspects including the investment strategy, member communication and also ensure the long-term nature of the savings by discouraging premature withdrawal and spending. These PEPP products will have an EU ‘stamp’, to show consumers that the savings plan adheres to EU standards and is portable throughout the EU.
Unlike the IORP, the PEPP is not yet available. It is still being developed by a close cooperation of public and private stakeholders. EIOPA, the European pensions authority is playing a leading role. The various industry bodies, varying from financial institutions, multinationals and trade unions to consumer protection groups, strongly support the initiative. Some local member states are still reluctant perhaps because they fear interference with existing local pension solutions and local vested interests. Recently, the European Commission and Parliament have started endorsing the plans. They have carried out a broad market survey in 2016 to collect more precise input on market needs and to establish even broader awareness and support
The cross-border European pension institutions (IORPs) are already a tested concept in the second pillar occupational pension market. The number of cross-border IORPs is steadily increasing and the 2016 revised IORP Directive will actively support the early movers. The individual pension savings product (PEPP) initiative is also gaining increasing support. It supports the creation of an understandable, accessible and portable product for all individuals in the EU. Now it is just a question of spreading the news and making even more multinationals, pension providers and citizens aware of these EU pension propositions.
(This is a shortened and revised version of an article published in Paperjam)