Portable pensions - win, win, win?
Dutch pension providers are among the biggest and most sophisticated in the world, yet are limited in their ability to offer their services to citizens of other countries. Disparate local pension regimes with their particular rules and cultures has proved a barrier to fund providers wishing to tap foreign markets.
That could be about to change with the launch in the EU of the Pan-European Personal Pension (PEPP) in mid-2017. PEPPs will be created under the auspicesof the EU’s Capital Markets Union (CMU), which is designed to channel the savings of European investors into long-term investment vehicles. This not only benefits savers, but increases the funds available to finance the EU economy.
PEPPs can be a tonic for individual investors
As part of their remit to bolster the EU economy, PEPPs are designed to encourage the movement of skills throughout the bloc, by offering pensions portability. Many investors are deterred from saving for retirement because they cannot take their pension entitlements with them when they relocate to other EU countries. Pension flexibility could mean more people will save for later life and larger pools of capital are created, leading to economies of scale and greater investment choice.
As well as offering portability, minimum standards mandated by the EU will mean PEPPs are more transparent than many existing products, are easier to understand and also less risky, all of which leads to higher consumer confidence.
And this confidence is vital. Individuals tend to postpone making decisions for retirement, and when they do they can be discouraged by poor performance, high fees and complexity. A recent study showed wide dispersion between returns of personal pension products across the EU. For instance, in Denmark, the average annual real returns of pension funds after charges and tax was around 4% from 2002 to 2013. However, in Bulgaria, Estonia, Italy, Latvia, Slovakia and Spain, there were negative returns for certain pension products in the same period. PEPPS offer the potential of improved performance for all EU citizens, which will increase the attractiveness of personal pensions and encourage higher take-up rates.
Obstacles to portable pensions
The path to PEPPs is not all downhill, however. In some countries, attractive tax regimes for personal pensions mean the PEPP may not be seen as valuable. The CMU action plan may have to address tax issues.
In addition, some national regulators are less than enthusiastic about PEPPS. According to the Dutch Pensions Federation (DPF), the plan would create an “unevenplaying field” between EU-regulated providers and existing occupational pension schemes. The DPF has also expressed concerns that cross-border product providers would be unable to offer local knowledge and expertise. A final concern by the DPF is that the PEPP plan over-emphasises pension products’ accrual phase.
These concerns may be valid but, on the flipside, PEPPs have the power to provide access to pensions among individuals who wouldn’t normally save for retirement. And they could also provide huge opportunities for Dutch – and other – pensions providers to expand their client bases.
Opportunities for fund managers
Currently, insurance companies manage about 90% of personal pension assets across the EU. Other suppliers, such as pension funds, investment companies and banks play only a marginal role. This indicates there is an opportunity to create stronger competition.
PEPPs could facilitate cross-border activity for fund managers, creating large pools of capital with economies of scale that allow for reduced administrative costs. Fund managers from the Netherlands and other countries could create central hubs from which they could deliver pensions services right across the EU.
If savers, providers and the EU economy can all benefit, the opportunity would seem to provide a rare win-win-win situation.