With the baby boomer generation approaching retirement and life expectancy continuing to improve, public sector pension liabilities will sooner or later exceed the available reserves, reinforcing the need for individuals to assume more responsibility for their own financial wellbeing, including ensuring adequate retirement income. This is not a new observation, but it is slowly gaining acceptance among the general population and, in particular, the younger generation, for whom there is more at stake.
The days when employees worked for the same employer throughout their working lives are over. More and more frequently, employees are changing employers several times, even across national borders.
However, the high degree of fragmentation between national markets and the limited degree of portability of personal pension products make it difficult for individuals to take up a job or retire in another EU member state.
The European Commission’s plan to provide pension providers with the tools to offer a simple pan-European personal pension product (Pepp) comes at the right time and is heading in the right direction.
One of the major cornerstones of the Commission’s Pepp proposal is indeed the fact that a Pepp is independent from an employment relationship and relates directly to an individual person. Every person can hold a Pepp individually and can carry their Pepp with them when moving from one employer to another or across all member states throughout their lifetime.
However, before the Pepp concept can be put into practice, a number of practical challenges have to be mastered. As is so often the case, tax issues are one of the most contentious.
A number of member states already use tax incentives to encourage people to save for retirement. Losing such tax benefits on moving to another member state is a major barrier to the cross-border portability of personal pension products. However, given the diversity and complexity of national tax regimes across the EU, the risk is real that Pepps fall outside the scope of national tax incentives, e.g. if the core product features do not match all national criteria for tax relief.
Member states cannot solve this problem on their own. The Commission therefore issued a recommendation on the tax treatment of personal pension products in June 2017, which encourages countries to apply to individuals who qualify as Pepp savers “the same tax relief as the one granted to national PPPs, once these Pepps are launched”.
Alfi is of the opinion that an appropriate tax treatment of the Pepp within the EU is essential to ensure that portability as one of its most important features can be achieved and would recommend that a certain level of convergence in the tax treatment of savers would be brought as from the outset throughout the EU.
The fact that the Pepp is designed as a cross-sector product brings up another issue: distribution. Alfi therefore advocates a harmonised distribution regime creating a level playing field for all types of Pepp providers.
Last but not least, the diversity of potential Pepp providers will inevitably lead to a multitude of investment options offered to Pepp savers. Appropriate investor education will thus be a fundamental part of making the Pepp a true success story.
Denise Voss is chairman of Association of the Luxembourg Fund Industry
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