EU Policy. Hype over hit: Brussels pensions plan is not working

The EU wants to encourage retirement saving - Copyright Tirelire Avenue/Pixabay

Published on 07/03/2024 - 11:44•Updated 08/03/2024 - 13:54

Two years after the new law took effect, the much-heralded pan-European pensions product has only one provider, in just four member states.

Five years after the EU finalised its new pan-European pensions product, PEPP, take-up is disappointing.

As it stands, there’s just one provider – Finax. Chief Executive Officer Juraj Hrbatý says its PEPP has around €11m in assets under management and is currently only available to savers in four member states.

“After one year of seriously running, we had around 5000 customers,” Hrbatý told Euronews. “It's less than we expected.”

By his own admission, his newcomer company is, in the context of the bloc’s trillion-euro pensions industry, still just “peanuts, nobody”.

At the time PEPP was launched it didn’t suffer from a lack of hype. Just before the last European elections in 2019, former Commission Vice President Jyrki Katainen said the PEPP would “give all citizens the opportunity to save for their retirement”, opening up a “genuine-pan-Eruopean market”.

Lawmakers such as Brian Hayes (Ireland/European People's Party) pointed to the need for a diverse range of providers, like asset managers and insurers.

A subsequent, February 2022 survey by the EU pensions authority Eiopa, done just a month before the regulation went live, suggested 21 entities, mainly insurers and asset managers, were considering an EU-approved retirement plan.

But those aspirations don’t yet seem to have materialised. Perhaps potential providers were deterred by the long list of EU legal requirements – to offer advice to savers and guarantee returns, all while keeping fees below 1% of capital.

To some extent these may just be the kind of teething problems that are inevitable as a new law beds in. A pension plan lasts decades, and it may take time for the market to adapt.

But it comes as Brussels bids to tempt retail investors into capital markets. Ministers are already talking of a Europe-wide savings product that could be the PEPP’s, hopefully more successful, younger sibling.

Bumpy

And Finax’s experience shows how bumpy it can be when political aspiration collides with bureaucratic reality.

Hrbatý says he “fell in love” with the PEPP concept, with an equity focus and pan-EU scope that’s a good match for the cadre of young workers who plan to forge careers across borders.

But getting a license from the domestic regulator is already “quite complicated”; he’s happy to expand on the many hurdles – financial, logistical, linguistic regulatory – that he’s faced in taking it to other countries.

In Poland, where half of Finax’s PEPP clients are, the relevant law only took effect in September; in Belgium it doesn’t exist at all. There’s no tax incentive to use the product in Germany, Sweden or Austria, while in his home country of Slovakia it’s worth a paltry €34, he says.

Regulators don’t always have the statistical models in place to verify compliance with the EU law, and in some cases they don’t even agree what the law means.

Hrbatý says he’s been waiting for months to get a straight answer on whether a company can sign up on behalf of employees, and that even major banks seem unaware the product exists.

EU divergence

Even architects of the law admit its results are disappointing.

“The end result is imperfect for sure ... of course we were hoping for more” than a single PEPP provider, said Jorik van Zanden, who as a staffer for Sophie in ‘t Veld (Netherlands/Renew Europe) had a key hand in drafting the law.

Van Zanden, now a PhD candidate at the University of Utrecht, said that the EU’s venture into pensions law was “already a step in the right direction,” and that he was aware of other providers who are still considering launching PEPPs in countries with a more developed market.

But you can see why the plan to unify EU pensions is an uphill struggle. Member states differ wildly in industry structures, consumer expectations and tax breaks. Private retirement savings range from 1% of GDP in some countries to over 200% in others.

In more advanced markets like the Netherlands, there’s less demand for EU alternatives, while others expect to rely on state provision.

Meanwhile, few governments are interested in reforming fiscal structures to meet Brussels’ whims. “To my knowledge, there’s no country that has changed its own tax treatment to apply it to PEPP products,” Nicolas Jeanmart, head of personal and general insurance at lobby group Insurance Europe, told Euronews. “I would not expect in the near future any PEPP being offered by an insurance company,” Jeanmart added, pointing to regulatory constraints that rule out any viable business model. “There’s a number of issues that would need to be overcome for the situation to change radically.”

Some hope redemption could come from a legislative review the commission is due to undertake shortly, five years after the law takes effect.

Broken market?

But for others, it’s the industry that needs fixing, not the legislation.

“The problem is not in the PEPP,” Sébastien Commain, research and policy officer at Better Finance, told Euronews, citing the financial inducements that intermediary advisors can receive recommending less suitable products, adding: “The PEPP is a competitive product in an unfair market.”

And Commain, whose lobby group represents financial service users, sees good prospects from new market entrants like Finax. The EU pension plan is “a very good wrapper for the kind of investment you can make with a robo-advisor or neo-broker,” being simple, cheap and transparent, he said.

“I imagine that kind of offer developing in the years to come,” he added, as online fund supermarkets expand to cover retirement savings.