How the EU plans to get more pensions invested in stocks
Petra Hielkema, chair of the EU’s pensions regulator Eiopa, wants to address the fact that EU citizens collectively hold around $39tn in savings but around a third of this is sitting in bank deposits - and she hopes reforms to pan-European pension products will help (Sarah Kastner/VVW)
Good morning. We recently covered Germany’s pension reforms, which mirror Sweden’s and which, Berlin’s government hopes, will encourage more savers to invest in the stock market.
This desire to encourage savers to invest in the stock market is not unique to Germany and there are multiple reasons behind it (for example the need for individual savers to build bigger pots to save government budgets from the cost of ageing populations). The economic benefits are also the reason some governments are encouraging pensions to invest domestically - more on this in the coming weeks.
But Germany, or Sweden, or Finland, are not operating alone here. European Union regulators are also trying to address a challenge whereby EU citizens collectively hold around $39tn in savings but around a third of this is sitting in bank deposits.
Petra Hielkema, chair of the EU’s pensions regulator Eiopa, told AOX this was one of the factors behind the looming reforms to the ‘pan-European pension product’ or Pepp.
The reforms, which will create what Hielkema called Pepp 2.0, were spurred by the low take-up of the original product by pension providers.
Hielkema said: “Europe does not have a savings problem; it has an investment problem. Europeans are among the world's strongest savers, but too much of those savings remain in low-yield deposits instead of working for people's retirement and for Europe's economy. Pepp 2.0 is about closing that gap while strengthening retirement security.
“Pension savings are uniquely suited to the long-term investments Europe needs. When more citizens build retirement savings through products like Pepp, those assets can also help finance Europe's priorities, from innovation and competitiveness to the green and digital transitions.
“The pan-European nature of Pepp would also help reach the necessary scale as providers could ‘channel’ consumers’ savings from across the continent into different funds, which can lead to better returns at lower costs.”
Among the reforms to encourage more pension fund providers to launch a Pepp is the removal of a 1 per cent cost cap and its replacement with a value-for-money framework, as well as the removal of requirements to establish sub-accounts in at least two member states before offering the product.
With many countries imposing domestic investment mandates on their pensions, Eiopa says Pepp 2.0 will not take that approach.
There are no mandatory quotas for investments in European assets in the current Pepp rules or in the reform proposals.
There are investment limits in the proposals, but around asset types rather than geography: the Basic Pepp must consist of at least 95 per cent listed equities and bonds.
Hielkema said: “The success of Pepp ultimately depends on scale. Developing a new pension product requires significant upfront investment, and providers need confidence that they can reach a sufficiently large market for that investment to make sense.
“Perhaps most importantly, Pepp should build on what already works. By allowing transfers from existing pension savings and recognising existing national pension products as Pepp (i.e. a Pepp label) provided that they meet the requirements, we could accelerate uptake dramatically and create the scale the market needs.
“With these changes, Pepp could move from being a niche product to fulfilling its original ambition. Once a product qualifies as Pepp, it can be passported across the EU, giving providers access to a much larger market and giving citizens more choice. The objective is not to replace successful national solutions, but to create a common European framework that builds on them.”
