FAQs on the pan-European Personal Pension Product for professionals

Disclaimer

The purpose of this list of frequently asked questions is to provide aid to the market in application of the PEPP legislative framework. This paper is not binding and not to be considered a Q&A in the meaning of Article 16b of the EIOPA Regulation.

The answers in this document reflect EIOPA staff’s views on the application of the PEPP legislative framework. They do not in any way constitute official legal interpretation of PEPP legislative acts, which can only be provided by the European Commission through the Q&A process. Finally, only the Court of Justice of the European Union is competent to authoritatively interpret Union law.

General questions

1. Will EIOPA do some work, possibly with the European Commission, to nudge Member States to take actions in the area of taxation to foster demand for PEPPs and to facilitate the portability of PEPPs across the EU?

The imposition of taxes and tax-beneficial treatment of personal pension products are solely within the remits of the Member States. The European Commission published a Recommendation on the tax treatment of personal pension products, including the PEPP, which provides that Member States are encouraged to grant PEPPs the same tax relief as the one granted to national PPPs, once these PEPPs are launched on the personal pension market, even in those cases where the PEPPs product features do not match all the national criteria required by the Member State to grant tax relief to PPPs.  Where Member States have more than one type of PPP, the European Commission encouraged them to give PEPPs the most favourable tax treatment available to their PPPs.

Such national conditions for tax beneficial treatment are part of the national provisions that need to be published by the national competent authorities (and correspondingly by EIOPA on its website).

2. Does EIOPA have any information about the potential take-up of PEPP?

EIOPA run a survey from 27 January 2022 to 28 February 2022, to better understand the potential take-up of PEPP by eligible providers. The results of this survey show that less than 20% of the 128 respondents are positively considering to offer a PEPP. The main interest comes from the asset management and the insurance industry.

3. Will EIOPA inform stakeholders on a regular basis on the number of PEPPs in the EU and on the number of providers offering PEPPs?

All PEPPs will be listed in the PEPP central register on EIOPA’s website, in accordance with Article 13 of the PEPP Regulation. This includes information about the providers. The central register is available at: https://pepp.eiopa.europa.eu/

4. Providers have to get in touch with their relevant home competent authority if they want to start offering PEPPs. Are providers only allowed to approach their relevant home competent authority with a formal request if all relevant application documents have been finalised? What if there are open questions?

Many national competent authorities encourage interested providers to get in touch with them before submitting an official application. Entering into a dialogue with the relevant national competent authority at an early stage may ultimately reduce time pressure for all stakeholders in the application process and can help providers to get a better understanding of the regulatory requirements.

Interested providers should reach out to their relevant home competent authority to see whether such an informal exchange upfront is possible or not.

5. Are providers, which would like to offer PEPPs, able to submit an application for registration of a PEPP together with a notification about the immediate opening of sub-accounts/distribution of PEPP cross-border?

Yes, this is possible. Providers do not have to wait for a decision about their application for registration of a PEPP.

6. Does the PEPP Regulation allow partnerships and what are the applicable rules? 

Article 19(2) of the PEPP Regulation introduces the possibility for providers to establish partnerships with registered PEPP providers to offer sub-accounts for different Member States in the context of the portability service. A partnership is a special form of an outsourcing agreement between PEPP providers. The PEPP provider remains fully liable for the provision of the PEPP. The specificities of the sub-account offered by the PEPP provider but outsourced to the partner are determined by the PEPP contract and the national specificities around accumulation and decumulation phases.

7. How can mandatory templates foster digitalisation and layering?

While allowing for layering including in a digital environment, the mandatory disclosure templates ensure comparability of product disclosures across PEPPs. Commission Delegated Regulation 2021/473 identifies which information should be provided in the first layer and which information can be provided in subsequent layers. Legal certainty about the completeness of the information provided is ensured, as the PEPP KID has to be made available also in the standardised format and when the layered document is printed.

8. When do PEPP-specific distribution rules apply in a sale process? 

The PEPP specific distribution rules apply with regards the retirement-related demands and needs test, the mandatory provision of advice as well as with regards the distribution related aspects of the Product Oversight and Governance requirements.

However, sectoral distribution rules (i.e., IDD, MiFID, and national distribution rules) apply for other aspects of distribution. 

9. What are the PEPP investment rules? 

Article 41 of the PEPP Regulation sets out the investment rules for the PEPP, unless there are more stringent sectoral rules applicable to the PEPP provider.

10. Are PEPP capital guarantees a type of risk mitigation technique?

‘Risk mitigation techniques’ means techniques for a systematic reduction in the extent of exposure to a risk and/or the likelihood of its occurrence. A ‘risk mitigation technique’ should therefore not be confused with a ‘capital guarantee’.

The Basic PEPP has to either provide a guarantee on the capital or it has to take the form of a risk mitigation technique. 

11. What are the practical consequences of withdrawing a PEPP registration?

The consequence of withdrawing a PEPP registration (deregistration) by a financial market participant is, first and foremost, that the PEPP cannot be sold anymore to new customers. Existing contracts usually stay in place and will be managed in line with national contract law. Providers of withdrawn PEPPs are liable for any damages caused to PEPP savers and may be charged with administrative penalties by national competent authorities.

12. Does EIOPA plan possible activities to support disclosure and comparability of PEPPs for the benefit of the potential savers, for example on costs or past returns – in particular with regard to long-term Insurance-based Investment Products and to long-term investment funds / other structured retail products?

Savers will be able to compare some aspects of PEPPs and PRIIPs, such as the presence of a guarantee. However, the comparability between PEPP and PRIIPs is limited due the differences in the methodologies underlying the disclosure of some specific aspects such as the risk class or cost disclosure. EIOPA will aim at promoting more comparability amongst retail investment solutions:

  • The Cost and Past Performance Report will also cover PEPPs, allowing to compare costs and returns amongst different retail solutions within EIOPA’s remit;
  • The work EIOPA is currently doing on value for money aims at bringing more cost efficiency and cost structure to the IBIPs market – and while comparability is not for the consumers – supervisors looking at the POG documentation for IBIPs – if the framework is implemented – will be able to compare more amongst IBIPs. In the future, EIOPA will supervise the value for money offered by PEPPs products via POG supervisory activities;
  • Potential savers will be able to make comparisons amongst PEPPs via the central public register on EIOPA’s website.
  • The current ESAP proposal also aims at bringing more comparability amongst products.

Questions relating to the stochastic model

13. Should the detailed information and technical documentation on the stochastic model be made public or should it be presented only during the registration process to the national competent authority and/or EIOPA?

The long-term nature and the retirement income objective of the PEPPs require stochastic modelling which is a tool to forecast the probability of various outcomes under different conditions, so as to project future PEPP benefits in a reasonable manner. It is therefore necessary to ensure that stochastic modelling is used when assessing the risk profile and the potential performance of the investment strategies offered by PEPP providers, reproducing the range of possible PEPP benefit outcomes that could be observed in real life due to uncertain asset returns and contribution levels. Stochastic modelling should also be used when determining the appropriate levels of ambition in terms of risks, when building the performance scenarios for the PEPP KID and the pension benefit projections for the PEPP Benefit Statement as well when implementing the methodology for the summary risk indicator effectively.

The stochastic model used by the provider is subject to a supervisory review by the home competent authority. It does not need to be made public.

14. As the national specific provisions on the accumulation and pay-out phase are not available for all Member States yet, how can prospective PEPP providers proceed with drafting the PEPP contract and setting-up the stochastic model?

National competent authorities are in charge of adoption and publishing the national provisions (in line with Article 12 of the PEPP Regulation). They are available on here.

Prospective PEPP providers should reach out to their relevant national competent authority.

15. How do national competent authorities make sure that providers do not have an unfair competitive advantage, because they are using more optimistic projections/assumptions for the setup of their stochastic model than other providers?  

Commission Delegated Regulation 2021/473 provides for the details on the building blocks of a stochastic model. EIOPA developed a stochastic model that can be used as a benchmark by national competent authorities. The actual implementation is subject to a supervisory review by the national competent authority.

The supervisory reviews of the stochastic models used by providers are precisely to make sure that the stochastic models are set up in line with the requirements in order to prevent providers from having an unfair competitive advantage.

16. With inflation going higher than 2% in Europe, which level of PEPP SRI EIOPAs stochastic model will compute? Will EIOPA request a warning message on potential negative net return?

The PEPP can only be offered if, taking into account the results of stochastic modelling, the expected loss, defined as the shortfall between the projected sum of the contributions and the projected accumulated capital at the end of the accumulation phase, is not higher than 20 % under the stressed scenario, which equals the fifth percentile of the distribution and it can be shown that the investment strategy and risk-mitigation techniques allow for outperforming the annual rate of inflation with a probability of at least 80 % over a 40 year accumulation phase. For the Basic PEPP another requirement is added (unless there is a capital guarantee): taking into consideration the results of stochastic modelling, recouping the capital at the start of the decumulation phase and during the decumulation phase with a probability of at least 92,5 %. However, where the remaining accumulation phase is equal to or less than 10 years when taking up the Basic PEPP, a probability of at least 80 % may be used when employing the investment strategy. In the PEPP KID, the SRI needs to be explained and one would expect that the risks/rewards as well as potential negative net returns are explained.

Commission Delegated Regulation 2021/473 does not envisage any standardised warning message.

17. Could EIOPA update us on the last version of the stochastic model  prepared for the PEPP?

In 2020 EIOPA developed a stochastic model for the PEPP, which supported the design of the regulatory technical standards and which can be used by PEPP competent authorities as a benchmark. EIOPA has not changed this model in the meantime; please see the description of the model here.

18. Does EIOPA know how national competent authorities plan to use the EIOPA Stochastic Model?

National competent authorities may use the model as a benchmark.

19. Can you confirm providers are not obliged to make use of the EIOPA stochastic-model but can develop and make use of self-developed stochastic-models?

Providers are not obliged to make use of the EIOPA stochastic-model but can develop and make use of self-developed stochastic–models, provided that the stochastic model is designed in line with the requirements of Commission Delegated Regulation 2021/473.

To calculate the annual rate of inflation, PEPP providers have to comply with the requirements set out in Annex III, paragraph 24 of the Commission Delegated Regulation (EU) 2021/473.

20. Can you clarify the extent to which a host competent authority can require adjustments to the stochastic-model used by a provider?

The host competent authorities may raise doubts with the home competent authority, and under certain circumstances with EIOPA, whether a stochastic model is in line with the PEPP Regulation. In such a case, the home competent authority and/or EIOPA have to act on such a notification, which may enforce an amendment of the stochastic model.

21. Is it obligatory for PEPP-providers to integrate wage-models with assumptions on unemployment and wage-growth paths as two main factors in their stochastic-models?

It is not obligatory to integrate the wage-model unless the PEPP’s product design entails features to protect against such risks or to adapt the contributions based on the career path.

22. Is there a reason for the lack of correlation between bond and equity models in EIOPA model?

The bond and equity models are correlated, because the short-rate also appears in the stochastic differential equation of the equity model. However, PEPP providers might opt not to apply the EIOPA stochastic model or introduce justifiable instantaneous correlations provided that they still comply with Commission Delegated Regulation 2021/473.

23. With regard to Article 14(3) of Commission Delegated Regulation 2021/473, in the case the remaining accumulation phase is equal to or less than ten years when taking up the Basic PEPP, the PEPP provider might use an investment strategy that ensures a probability of at least 80% of recouping the capital. Is there a minimum investment horizon to respect the probability of 80% (is it 5 years)? In case a saver started to invest in the PEPP 10 years plus 1 day before retirement; should the 92.5% probability be applied for the whole period until retirement?

We would expect the stochastic modelling to cover the full lifecycle of a product. The results of the stochastic model would show whether the conditions are met, which are different for the different lengths of the accumulation periods. In case a saver started to invest in the PEPP 10 years plus 1 day before retirement; a 92.5% probability should be applied for the whole period until retirement.

24. The provision of Article 14(2) and Annex III, part 1 of Commission Delegated Regulation 2021/473 require that the risk-mitigation technique ensures that the expected loss, defined as the shortfall between the projected sum of the contributions and the projected accumulated capital at the end of the accumulation phase, is not higher than 20% under the stressed scenario, which equals the fifth percentile of the distribution. How to determine “the shortfall between the projected sum of the contributions and the projected accumulated capital at the end of the accumulation phase”, is it a maximum or a quantile? Is it correct to assume that the stressed scenario is the 5% quantile?

The  ‘expected loss’ is a different concept than the ‘expected shortfall’. For the expected loss in Article 14 of Commission Delegated Regulation 2021/473, the projections of forthcoming contributions and the expected accumulated capital under the stressed scenario (fifth percentile) are taken. The allowed maximum difference between the sum of contributions and the accumulated capital at the end of the accumulation period cannot be higher than 20% of the sum of contributions.

25. What are “the costs for signing up to the contract” and “the one-off fees if the contract is terminated within five years”?

According to Article 4 of Commission Delegated Regulation 2021/473, all costs and fees charged to the prospective PEPP saver, before saving in the PEPP, shall be separately disclosed as ‘initial costs’. Further, Annex 1, part 1, number 24 sets out that under the title ‘One-off costs’, the PEPP provider shall present the costs for signing up to the contract and the one-off fees if the contract is terminated within five years.

Questions relating to supervision

26. What is EIOPA’s plan to promote a common supervisory approach by the national competent authorities in order to avoid possible asymmetries?  

The PEPP Regulation requires a strong supervisory framework for the PEPP, covering a thorough assessment for the registration of eligible PEPPs, the effective monitoring of ongoing compliance with the conditions set out for the registration and ongoing supervisory activities tailored to the specificities of a pension savings product. 

EIOPA developed a supervisory framework, which aims at fostering supervisory convergence for PEPPs. The framework lays down the principles for market monitoring activities and for product oversight aspects for those PEPPs, which may require – based on the higher risks identified – higher supervisory scrutiny. EIOPA is currently focusing on the processes around the registration of PEPPs. Key areas of EIOPA’s future work on supervisory convergence are future analyses of the PEPPs, including on costs and past performance. Further tools will be developed to develop joint/common supervisory plans for PEPP so national competent authorites take a coordinated view/approach. As the PEPP supervision develops further work on supervisory handbooks, to ensure a common supervisory approach on key requirements, will also be developed.

27. What will be the implication of the PEPP Regulation (re)introducing a product-based supervisory approach in the insurance sector?

The PEPP Regulation requires a strong product supervisory framework for the PEPP, covering a thorough assessment for the registration of eligible PEPPs, the effective monitoring of ongoing compliance with the conditions set out for the registration and ongoing supervisory activities tailored to the specificities of a pension savings product. 

All national competent authorities are in the process of stepping up and developing their processes to carry out the supervision of this product regulation. The cooperation amongst supervisors of different sectors, including from the insurance sector, proves to be very effective in this respect.

For IBIPs, supervisors already have a risk-based product focus in supervision, looking at Product and Oversight and Governance supervision, disclosures (PRIIPs) and supervision of the sale process of IBIPs under IDD. The implications of the PEPP Regulation for the insurance sector are similar to the implications of compliance with the rules applicable for IBIPs, where for example supervisors focus on the conduct of business of insurance undertakings with regards the value for money offered to consumers by the products. Moreover for insurers offering PEPP product oversight activities relating to PEPP will ensure the outcomes envisaged by the PEPP Regulation are achieved for PEPP products.

28. If product intervention powers shall be used by a national competent authority, but the product provider does not fall into its usual scope of activities, should the intervention be conducted by that competent authority or by the authority in charge of supervising the provider of the PEPP?

The PEPP Regulation sets out product intervention powers for national competent authorities and for EIOPA, applicable to all types of PEPP providers.

National competent authorities have been designated at the national level to supervise the PEPP providers. It is defined at national level whether one national competent authority is in charge of supervising PEPPs offered by any PEPP provider or only the PEPPs offered by the PEPP provider(s) falling under the scope of its activities. In the former case, the national competent authority is empowered to use its intervention powers to  address significant PEPP saver’s detriment or risks to the orderly functioning and integrity of financial markets or the stability of whole or part of the financial system, irrespective of whether the PEPP provider falls under its scope of activities or not.