What is a PEPP – Pan-European Personal Pension Product?

publication date: December 5, 2022

Polish draft of the PEPP statute

On March 22, 2022, the deadline for the implementation of the EU Regulation 2019/1238 on PEPP expired. The draft of the Polish act itself was created at the end of 2020. However, in this case, most European Union countries act sluggishly and have still not implemented the content of the regulation into their legal systems. The only example of implementing this regulation is Slovakia and the fintech headquartered there Finax.

Purpose of the PEPP

The main objective of this product is to create such a voluntary pension product that will be used throughout the European Union. The Union is aware that, due to the difficult demographic situation, Member States will provide pensions in such amounts that will not allow for a peaceful, safe and, above all, dignified life after many years of hard work. For example, in Poland, the amount of pensions of current 30- and 40-year-olds is estimated at only 25% of their current salary. Suggested by the EU, it is to build self-awareness of citizens regarding saving. It is also an incentive to take better care of your finances and manage your household budget by increasing your retirement savings.

The EU Regulation defines a PEPP as ‘an individual non-employment retirement product that a PEPP saver enters voluntarily with a view to retirement. Since PEPPs should be based on long-term capital accumulation, the possibilities for early withdrawal of capital should be limited and may be subject to penalties’. It follows that it is to be a voluntary retirement product unrelated to an employment relationship. The creators of this idea think about it in the long term, which is to bring positive effects in the longer term, while limiting the right to sell. The assumption of this act is also the universality of this product throughout the EU, which is why the form of a regulation for this subject was adopted, and not a directive, which would not be binding on all Member States, as is the case with a regulation.

PEPP registration

The Member State is to establish a specific authority to receive and decide applications for registration. Such applications may be submitted only by selected types of entities: credit institutions, insurance companies, PPE institutions (Employee Pension Schemes), investment companies, investment or management companies, managing alternative investment funds from the EU.

These applications are to contain the following elements:

– standard PEPP contract terms to be offered to PEPP savers;

– information about the identity of the applicant;

– information on portfolio and risk management and administration arrangements for the PEPP;

– where applicable, a list of Member States where the applicant PEPP provider intends to market the PEPP;

– information on the identity of the depositary, where applicable;

– PEPP key information;

– a list of Member States for which the requesting PEPP provider will be able to ensure the immediate opening of a sub-account.

With a positive decision, this authority is to submit this information to EIOPA (European Insurance and Occupational Pensions Authority) together with the necessary documents and information within five working days of the decision to register the PEPP. In turn, EIOPA has five days to register the PEPPs in the central public register (which collects all registered PEPPs) and notify the competent authorities without undue delay.

Freedom to provide services

PEPP providers may offer PEPPs and PEPP distributors may distribute PEPPs within the territory of the host Member State under the freedom to provide services or the freedom of establishment, provided that they do so in accordance with the relevant rules and procedures.

PEPP providers shall provide the competent authorities of their home Member State with the following information upon notification of their intention to open a sub-account for that host Member State:

– name and address of the PEPP provider;

– the Member State where the PEPP provider intends to offer or distribute PEPPs to PEPP savers.

Where the competent authorities of the host Member State have reason to believe that a PEPP is distributed in their territory or a sub-account for that Member State has been opened in breach of their obligations, they shall communicate their findings to the competent authorities of the home Member State of the PEPP provider or PEPP distributor.

PEPP savers who move to another EU Member State have the right to use the portability service, which in turn gives them the right to continue contributing to their existing PEPP account. It is a very good solution for mobile workers and young people. It is worth noting that more and more people live in a country other than the country of their citizenship.

Obligations of suppliers and distributors

Where PEPP providers provide a portability service to PEPP savers, they shall also ensure that if a new sub-account is opened in a separate PEPP account, it complies with the legal requirements and conditions for PEPP.

Services are to be provided honestly, reliably, professionally and with respect for the client’s interest – their welfare is to be particularly taken into account when conducting business related to PEPP. Key Information Document (KID) is also important, which is intended to fulfill a kind of information obligations towards the client. KIDs are to be published on the supplier’s website before the first bids are submitted. In the EU regulation, issues related to KID have been precisely regulated.

Before concluding a PEPP contract, the PEPP provider or PEPP distributor shall determine, on the basis of the required information received from the prospective PEPP saver, the prospective PEPP saver’s requirements and retirement needs, including the possible need to purchase a product offering payment in installments, and shall make available objective information on the PEPP in an understandable form to enable the recipients to make an informed decision. Also at that time, the PEPP provider or PEPP distributor shall advise the prospective PEPP saver in the form of a personalized recommendation explaining why the PEPP, including the relevant investment option, as applicable, would best meet the requirements and needs of the PEPP saver.

Investment by PEPP providers

In investing, the PEPP provider is primarily to be guided by the prudent person principle. This means investing in the interests of PEPP savers over the long term, taking into account the risks involved.
Through the application of risk mitigation techniques, the PEPP investment strategy is designed to enable a stable and adequate personal PEPP retirement income in the future and to ensure fair treatment of all generations of savers. You also need to ensure the safety, liquidity, profitability and quality of the assets you invest in.

PEPP providers can offer savers up to six different investment options while still providing them with a sufficient level of protection. These variants include the basic variant and various versions of the alternative variants. The saver’s decision on the choice of a specific investment option should be made after receiving appropriate information and advice, so that his decision is made consciously, with a sufficient level of knowledge.

Where alternative investment options are offered, the saver shall have the right to change the investment option during the PEPP accumulation phase at least five years after the conclusion of the PEPP contract, and for subsequent changes, five years after the last change of the investment option. The PEPP provider may allow the PEPP saver to change the selected investment option more frequently.

PEPP providers shall designate one or more custodians responsible for the safekeeping of assets in connection with PEPP activities and oversight duties.

Investing in ETFs

The Slovak solution includes investing in ETFs. This solution assumes that at the beginning of saving, 80% or 100% of funds are invested in ETFs. 10 years before retirement, part of the portfolio is shifted to bond ETFs to limit the impact of market fluctuations on the value of the portfolio. In both variants, at the time of retirement, 60% of the portfolio is to be stock ETFs and 40% bond ETFs.

What are these ETFs? It is a publicly traded fund.

The rules that govern ETFs are:

  • They are subject to national and EU regulations,
  • participation units of ETF funds are issued by the fund created by the Towarzystwo Funduszy Inwestycyjnych,
  • there is an annual fee for managing the ETF, but they are set at a minimum level,
  • ETFs are created for an indefinite period, with the possibility of termination in certain cases.

They are based on passive management, which means that the purpose of ETFs is to mirror the behavior of a given stock index (stock, bond or commodity index). The task of the manager in this model is to reproduce the index as accurately as possible and faithfully imitate its changes.

The costs associated with the investment are low. The ETF fund manager bears the costs of stock exchange, safekeeping of assets with the custodian, administration and license fees. An ETF management fee is charged to cover these costs. Due to the passive management method, this fee is several times lower than the fee charged for managing FIO or FIZ funds.

Thanks to listings on the stock exchange, ETF funds are constantly valued by the market during the trading session. Investors who own or intend to purchase ETF units may do so at any time. FIO funds, which are valued at most once a day, do not have such an advantage, and purchase or redemption orders are usually executed within a few days.

ETFs are based on indices and their prices can fluctuate significantly. Unfavorable price movements of the underlying indices have a direct impact on the prices of ETFs.

The risk of removing an ETF from the stock exchange (delisting risk) is that ETF shares are no longer listed on the stock exchange. In such a situation, however, investors usually do not lose their capital – the issuer buys back the shares from them and pays them the funds due (equal to the net asset value attributable to the shares held). In the worst-case scenario, when the repurchase value is less than the purchase value, investors may be forced to realize what was previously only an accounting loss.

PEPP customer complaints

PEPP providers and PEPP distributors shall put in place and maintain adequate and effective procedures for dealing with complaints from PEPP customers regarding their rights and obligations. Those procedures shall apply in each Member State where the PEPP provider or distributor offers its services and shall be available in the official language of that Member State or in another language agreed between the PEPP provider or distributor and the PEPP customer.

In response to a complaint, you must address all issues raised within a reasonable period of time and no later than 15 working days after receipt of the complaint. In exceptional circumstances, where it is not possible to respond within 15 working days for reasons beyond the provider’s or distributor’s control, they are required to send an initial response clearly stating the reason for the delay in responding to the complaint and the date by which the PEPP customer will get a final answer. However, the period of 35 days cannot be exceeded.

Change of PEPP provider

At the request of the PEPP saver after at least five years from the conclusion of the PEPP contract, and in the case of subsequent changes after five years from the last change, legacy providers are required to transfer the relevant amounts or contribution-in-kind from the PEPP account held with the legacy PEPP provider to a new PEPP account with the same sub-accounts opened with the prospective PEPP provider, with the existing PEPP account being closed.

As part of the switching service, the transferring PEPP provider shall provide the transferring PEPP provider with all information relating to all sub-accounts of the transferring PEPP account, including reporting requirements. The prospective PEPP provider shall record this information in the relevant sub-accounts.

The total fees and commissions charged by the transferring PEPP provider to the PEPP saver for closing their PEPP account shall be limited to the actual administration costs incurred by the PEPP provider and shall not exceed 0.5% of the relevant amounts or the monetary value of the in-kind contribution to be transferred to the future PEPP provider.

Payment methods

Possible forms of payment are:

1) payment in installments;

2) one-off payment;

3) payments reducing accumulated capital;

4) a combination of the above forms.

PEPP savers can choose the form of withdrawals when they enter into a contract and open a new sub-account. Withdrawal methods may vary depending on the sub-account. Where PEPP providers offer different forms of payouts, PEPP savers may change the form of payouts on each sub-account one year before the start of the decumulation phase, at the start of the decumulation phase and at the time of switching providers.

If the PEPP provider offers different forms of payouts, the PEPP saver has the right to change the form of payouts on each sub-account opened:

a) one year before the start of the decumulation phase;

b) at the beginning of the decumulation phase;

c) when changing supplier.

Such a change shall be made free of charge for the PEPP saver.

Legal basis:

Regulation 2019/1238 on a pan-European personal pension product (PEPP) of 20 June 2019 (Official Journal of the EU.L.2019.198.1)