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Pan-European personal pension product

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Pan-European personal pension product

SUMMARY OF:

Regulation (EU) 2019/1238 on a pan-European personal pension product

WHAT IS THE AIM OF THE REGULATION?

It establishes the legal foundation of the pan-European personal pension product* (PEPP) by ensuring the standardisation of the core product features, such as:
- transparency requirements;
- investment rules;
- the right to switch providers; and
- the different investment options.
It also lays down uniform rules on registering, manufacturing, distributing and supervising personal pension products that are distributed in the European Union (EU) under the PEPP designation.
The PEPP is a voluntary personal pension scheme that complements existing public and occupational pension systems, along with national private pension schemes.
The regulation aims to give savers more choice and provide them with more competitive personal pension products when saving for retirement, while enjoying strong consumer protection.

KEY POINTS

The PEPP regulation lays down uniform rules on the core PEPP features, in particular on the following key points.

PEPP providers*

PEPPs can be offered by a wide range of financial institutions, including insurance undertakings, asset managers, banks, certain investment firms and certain occupational pension funds.

PEPP contract

The regulation sets out the minimum requirements for the content of the contract agreed between PEPP providers and PEPP savers*.

Registration of PEPPs

Providers that want to offer a PEPP need to follow a registration process. The European Insurance and Occupational Pensions Authority registers new PEPPs in a central register, on the basis of a decision taken by national competent authorities. Once registered, the product can be provided and distributed throughout the EU.
The regulation describes in detail the PEPP registration procedures, the circumstances for deregistering a PEPP and the powers of the competent authorities of the home and host EU Member States.

EU passport

PEPP providers and distributors benefit from an EU passport, which allows them to sell PEPPs in different Member States. The passport allows them to access the entire EU market with a single product registration granted on the basis of a single set of rules.

Portability

When proposing a PEPP, providers or distributors must provide prospective PEPP savers with information on the portability service* and on which sub-accounts* are immediately available.
Where PEPP savers change their residence to another Member State, they can continue to contribute to the same PEPP either by opening a PEPP sub-account with the same PEPP provider in their new country of residence (where such an option is available with their PEPP provider) or continuing to contribute to their existing PEPP sub-account. In the event that their PEPP provider does not provide for such an option in their new country of residence, PEPP savers have the right to switch PEPP provider immediately and free of charge. PEPP providers must open at least two sub-accounts after a transition period of 3 years.

Switching

PEPP savers can switch PEPP provider after a minimum of 5 years from the conclusion of the PEPP contract and in case of subsequent switching, after 5 years from the most recent switch. The PEPP provider may allow PEPP savers to switch PEPP providers more frequently. The fees and charges for the switching service must be limited to the actual administrative costs incurred by the transferring PEPP provider and capped at 0.5% of the value of the transferred assets.

Investment options

PEPP providers can provide up to six investment options, including the default investment option – the basic PEPP*. All investment options must be designed by PEPP providers on the basis of a guarantee or risk-mitigation technique that ensures sufficient protection for PEPP savers.
For the basic PEPP, PEPP providers must protect PEPP savers’ capital either by a guarantee or by risk mitigation techniques consistent with the objective to allow the PEPP savers to recoup the capital. Costs and fees for the basic PEPP must not exceed 1% of the accumulated capital per year.
PEPP savers have the right to change investment option regularly in order to adapt their investment strategy. This right is free of charge and can be exercised after a minimum of 5 years from the conclusion of the PEPP contract and, in the case of subsequent changes, after 5 years from the most recent change of investment option. PEPP providers may allow PEPP savers to change their investment option more frequently.

Type of out-payments

PEPP providers can offer PEPP savers one or several types of out-payments (annuities, lump sum, regular drawdown payments or a combination of these).
PEPP savers can choose the form of out-payments for the decumulation phase* at the conclusion of a contract and when opening a new sub-account. The form of out-payments may differ from sub-account to sub-account. If PEPP providers provide different forms of out-payments, PEPP savers can modify the form of out-payments of each sub-account 1 year before the start of the decumulation phase, at the start of the decumulation phase and at the moment of switching.

Distribution of PEPPs

The regulation sets out the conditions under which PEPP providers and PEPP distributors* may distribute PEPPs.
The distribution regime of the PEPP follows a sector-by-sector approach. Insurance companies and insurance intermediaries that distribute a PEPP are subject to the insurance distribution directive (Directive (EU) 2016/97), while investment firms and other PEPP providers and distributors will have to apply the rules in the markets in financial instruments directive (Directive 2014/65/EU).

Advice

PEPP providers and PEPP distributors are required to provide prospective PEPP savers with comprehensive advice before the PEPP contract is signed, in order to enable them to make a fully informed decision and choose the product that best suits their needs. The advice must also cover the choice of investment option and personalised pension benefit projections. Before the signature of the contract, all PEPP providers and distributors must have PEPP savers carry out a test on their retirement-related demands and needs to determine which PEPPs would be suitable for them, if any. This test must also include a specific check to determine whether the PEPP savers need a PEPP offering annuities, in order to ensure adequate protection against longevity risks.
In addition, for the basic PEPP, PEPP providers must provide PEPP savers with mandatory personalised retirement planning advice at the start of the decumulation phase, with a personal recommendation on the optimal form of out-payments.

Information

To ensure a high level of transparency, the regulation provides that PEPP savers must receive:
- To ensure a high degree of consumer protection, PEPP savers will not have any possibility to waive advice before the conclusion of the contract, key information about the product through a standardised document (i.e. the PEPP key information document);
- every year, a PEPP benefit statement with key information about the development of their savings.
In particular, costs and fees must be fully transparent.
The European Commission must further specify by regulatory technical standards the details of the presentation of the information to be provided in the PEPP key information document and the PEPP benefit statement.

Sustainability factors

PEPP providers are encouraged to take into account environmental, social and governance (ESG) factors*.
PEPP providers should provide PEPP savers with information, where available, relating to the performance of the PEPP providers’ investments in terms of ESG factors.
They should also provide PEPP savers in the PEPP benefit statement with information on how the investment policy takes into account ESG factors. In line with the prudent person rule, PEPP providers must take into account risks related to, and the potential long-term impact of, investment decisions on ESG factors.

Supervision

Compliance with the PEPP regulation must be supervised by the national competent authorities of the PEPP providers and distributors. However, the European Insurance and Occupational Pensions Authority has product-intervention powers that allow it to take effective, EU-wide measures in case of a significant PEPP saver protection concern or of a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the EU’s financial system that are not adequately addressed by national competent authorities.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 22 March 2022.

BACKGROUND

For more information, see:

Personal pension products (European Commission).

KEY TERMS

Personal pension product. A product that is based on a contract between an individual saver and an entity on a voluntary basis and is complementary to any statutory or occupational pension product. It provides for long-term capital accumulation with the explicit objective of providing income upon retirement and with limited possibilities for early withdrawal before that time. It is neither a statutory nor an occupational pension product.

PEPP provider. A financial undertaking authorised to manufacture a PEPP and to distribute that PEPP.

PEPP saver. An individual who has concluded a PEPP contract with a PEPP provider.

Portability service. A service that gives PEPP savers the right to continue contributing into their existing PEPP account after changing their residence to another Member State.

Sub-account. A national section that is opened within each PEPP account and that corresponds to the legal requirements and conditions for using possible incentives fixed at national level for investing in a PEPP by the Member State of the PEPP saver’s residence. Accordingly, an individual may be a PEPP saver or a PEPP beneficiary in each sub-account, depending on the respective legal requirements for the accumulation phase. The accumulation phase is the period during which assets are accumulated in a PEPP account; it ordinarily runs until the decumulation phase starts.

Basic PEPP. All PEPP providers will need to offer an affordable default investment option (the basic PEPP) with costs and fees capped at 1% of the accumulated capital per year.

Decumulation phase. The period during which assets accumulated in a PEPP account may be drawn upon to fund retirement or other income requirements.

PEPP distributor. A financial undertaking authorised to distribute PEPPs not manufactured by it, an investment firm providing investment advice, or an insurance intermediary.

ESG factors. A set of criteria that socially conscious investors use to screen potential investments to ensure they support the principles of sustainable development. Environmental criteria relate to how a business performs as a steward of nature. Social criteria look at how it manages relationships with employees, suppliers, customers and the communities in which it operates. Governance criteria concern issues such as its corporate leadership and its approach to executive pay, audits, internal controls and shareholder rights.

MAIN DOCUMENT

Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019 on a pan-European Personal Pension Product (PEPP) (OJ L 198, 25.7.2019, pp. 1–63).