An interview with Christian Lemaire, Global Head of Retirement Solutions at Amundi
In light of the recent publication of the Pan-European Personal Pension (PEPP) Regulation and the EIOPA consultation specifying the pension product’s features, we decided to take a moment to examine the PEPP’s implications. Chrystelle Veeckmans, Chairman of the Association of Luxembourg Pension Funds and of the KPMG Luxembourg Pension scheme, sat down with Christian Lemaire, Global Head of Retirement Solutions at Amundi Asset Management, to help shed some light on the product’s status and outlook.
Chrystelle Veeckmans (CV): Christian, five years after writing my first blog post on PEPP, where are we in the implementation process of the Pan-European Personal Pension product? When are the first PEPPs expected to be launched and by whom?
Christian Lemaire (CL): The final PEPP regulation text was published in the Official Journal of the EU on 25 July 2019. EIOPA has been mandated by the European Commission to develop so-called Level 2 delegated acts on various topics and it launched a public consultation that closed on 2 March 2020. The PEPP will only be available one year after those Level 2 delegated acts are approved by the European Commission, probably at the end of 2020. Considering the time it usually takes to develop technical standards, we don’t expect to see the first PEPPs before 2022. They will most likely first be launched by large local players who know their market well. The legislation allows for bankers, asset managers and even some Institutions for Occupational Retirement to provide PEPPs. However, the objective of the obligatory basic investment option to offer capital protection after inflation may prove difficult for capital guaranteed products in the current low interest rate environment. Banks are more likely to act as distributors of the product and asset managers on the structuration side, through life cycle strategies in particular.
CV: Who is PEPP for and what are the objectives that led to its creation?
CL: The objective of the Commission in developing the PEPP is twofold: help address the demographic challenges caused by the aging population and the pension gap it creates, while channeling more savings into long-term investments that contribute to the development of the capital markets union and European growth.
Turning to the product itself, the PEPP is a voluntary personal pension scheme that will be available to all EU citizens. It is not an alternative to state pension (pillar 1) or to occupational pension (pillar 2) but comes as an additional option to personally save more for retirement (pillar 3).
CV: What makes this product innovative, and what elements are necessary for its success in helping savers?
CL: The PEPP is designed to be a simple, flexible, modern and cost-effective product with strong investor protection. Portability is one of its key features, allowing individuals to continue saving in the same product via sub-accounts in different countries. So, when people change residence across EU borders, they can rely on a product that supports the rising trend of worker mobility in Europe. In terms of investment possibilities, the product could offer up to six investment options, one of which should be a safe product representing the default option, called the Basic PEPP. After five years, savers have the possibility to change the chosen option or switch PEPP providers.
Although the PEPP offers interesting features, its success among savers highly depends on its fiscal treatment, an area that may not be regulated. The Commission might only strongly recommend that each member state treats the PEPP like other national pension products from a fiscal point of view. If this does not happen, savers might not show any interest in the PEPP.
CV: What came out of the EIOPA consultation that makes the product unworkable?
CL: In the providers’ eyes, the product’s success will largely depend on the detailed requirements that will be set by technical standards. At this stage, potential PEPP providers remain skeptical and are waiting to learn more about the content of the Level 2 to further assess if the product will be workable.
Let’s take two examples of potential requirements that make the PEPP unattractive:
EIOPA proposed using its Ultimate Forward Rate (UFR), which is 3.75 percent in 2020, as proxy for the risk-free rate over the long term. This is far higher than current and, most probably, future financial market conditions for risk-free rates! Risk premia per asset classes would be added to the UFR to communicate a benchmark for the expected performance. This benchmark is not only unachievable but would also be confusing and discouraging for savers. It would be more appropriate to communicate on the long-term expected returns (over a minimum of 20 years) of each PEPP based on stochastic models.
The one-percent Fee Cap on the accumulated capital per year applicable to the Basic PEPP is another example. EIOPA proposes excluding from the Fee Cap costs linked to any provided capital guarantee or biometric cover, as well as switching costs, but includes the cost of advice.
The factors to consider when opening a PEPP are clearly defined: the person’s knowledge and experience in the investment field relevant to the PEPP; the person’s financial situation, including ability to bear losses; his or her investment objectives, including risk tolerance; and his or her accrued individual retirement entitlements. In addition, providers will have to check if the PEPP is the most appropriate savings product (suitability). As the contributions will be blocked until retirement, providers will also have to check affordability. Therefore, providers will need to give complete, detailed and personalized advice before initiating a personal pension plan. This implies significant time and cost. Several market studies show that including these advice costs in the one-percent Fee Cap will not be economically viable.
CV: Do you think PEPP will be digital and low cost?
CL: The PEPP opens up the possibility of fully digitalized distribution via the use of robo-advisors. However, robo-advisors have experienced limited success in the past years and most of them have ceased operations, recognizing that they were unable to attract a sufficient number of investors.
As mentioned, choosing a pension product presents a critical decision for savers, who will likely require detailed and highly personalized advice. Quality advice hinges on competent advisors and comes at a cost. This takes us back to the one-percent Fee Cap of the basic PEPP.
CV: Will we see the first PEPP in Luxembourg?
CL: Luxembourg, a cross-border domicile of investment products, is ideally positioned to become the main future hub for personal pension products in Europe.
CV: So, Christian, in a nutshell, PEPP is an excellent idea for solving Europe’s pension problems, but its practical implementation still raises many questions. It is essential that the regulator makes room for feasibility and that member states ensure adequate national tax incentives to allow the product to exist.