PEPP – Paving Europe’s Pension Path

Courtesy of an EU-wide regulatory initiative, part of the Capital Market Union (CMU) project, EU employees will soon have more options for their retirement savings. The creation of the Pan-European Pension Product (PEPP) is a huge opportunity for asset managers.

As people continue to live longer, they are starting families later, and supporting their children and parents longer than ever before. Now, economists and actuaries are only just beginning to grapple with the ever-growing pension funding gap.

In May, the World Economic Forum (WEF) reported that the six largest pension saving systems in the world, the US, UK, Japan, Netherlands, Canada, and Australia will have a $224 trillion pension shortfall by 2050. This figure includes all three pillars of pension funding: corporate, public, and individual private pensions. The WEF report, and others like it, consistently highlight the cumulative impact continued low interest rates, a lower for longer investment return environment, and aging populations have on pension plans’ ability to cater to the retirement needs of the global population.

Europe’s Policy Solution

Private pension choices are limited in some EU countries and non-existent in others. To bridge the pension funding gap and increase pension choices and personal participation rates across EU member states, the European Commission proposed the PEPP as part of its CMU initiative. The PEPP is a new investment vehicle which may be sold to retail investors on a cross-border basis by insurers, banks, or asset managers. PEPP seeks to complement, not replace, current pension regimes. PEPP will also reduce costs through economies of scale which the European pension market lacks currently.

The PEPP proposals cover the following areas:


Specific standardized authorization procedures are laid out for asset managers and management companies to the European Insurance and Occupational Pension Authority (EIOPA). PEPP may benefit from EU passports allowing them to be freely sold into all member states on a cross-border basis.


Within three years of implementation, the PEPP must provide a national compartment for every EU member state. People must also be given the opportunity to change domicile while remaining within the same PEPP on identical terms.

Cross-border Supervision

The national regulator supervises PEPP compliance directly. EIOPA will monitor the market for any misuse of the PEPP label by unauthorized products.

Accumulation and Decumulation Phases

Investors will have five distinct investment options including a default option. Local regulators will have discretion to determine age limits, duration, and flexibility of payment arrangements.

Investor Protection

A simplified cross-border distribution framework will underpin PEPP with no undue local burdens. Standardized disclosure documents, like the UCITS KIID and PRIIPs KIID, must be provided to incoming investors. There’s also an ongoing obligation to provide investors with a PEPP benefit statement in addition to general conditions on suitability and advice with funds.

Ability to Switch

Investors must be allowed to switch from one PEPP to another and charges to do so must be capped to a maximum of 1.5%. Investors are limited to one switch every five years. This allows for switching on a cross-border basis.

Asset Management Opportunity

The PEPP is a proactive regulatory action that presents asset managers with a new opportunity to access pension investors collectively on a cross-border basis. The European Commission’s impact assessment report suggests that PEPP will result in a growth of EU personal pension assets under management from €700 billion to €2.1 trillion by 2030, against a growth of €1.4 trillion without it.

The PEPP can act as an additional cross-border EU investment vehicle to live alongside UCITS and AIFMD funds. The UCITS success story contains several lessons that can be leveraged to make cross-border PEPP a success. These include:

  • Strong EU foundational framework through political and regulatory bodies
  • Harmonized regulatory rule-set across all EU member states
  • Consistent format for investor disclosure documents
  • Investor protection led portfolio composition rules, yet flexibility to generate returns
  • Depositary appointments that oversee investor interests, boosting their confidence
  • Cross-border access enables scale and benefits investor diversification and economies of scale
  • Leverage of UCITS distribution partners and infrastructure to connect with end investors

The Taxation Hurdle

Taxation is the biggest hurdle to vault before PEPP can truly take flight. Within the PEPP consultation, work was conducted to evaluate the possibility of creating a harmonized cross-border tax regime across the EU. Despite a high degree of tax differences across EU pensions, PEPP does not propose unified tax features on a pan-EU basis. Within the EU, tax remains at the discretion of each member state and suggestions of harmonization have generally fallen on deaf ears. The European Commission has chosen not to carve out special tax rules for the PEPP, although the asset management industry pushed for this outcome. Tax policy is a critical component of member state sovereignty. The absence of tax neutrality or consistency across the EU for the PEPP weighs heavily on its cross-border ambitions, so that will be a key policy battleground as the proposal is debated.

Next Steps

PEPP is only beginning its legislative journey. Like every similar rule of consequence, PEPP must pass through the usual triumvirate of Parliament, Council, and Commission before the final rule set is agreed upon. In the meantime, asset managers should understand the policy shift, opportunity, and engage in open policy debate framing PEPP. Asset managers can play a key role in education to increase the general level of financial literacy when it comes to pension plans across the EU.