06 March 2020

EFAMA’s Response to EIOPA’s Consultation on PEPP Level-2 Measures

In a response to EIOPA’s Consultation on PEPP Level-2 Measures, EFAMA, the voice of the investment management industry has said that the cost of advice should be excluded from the fee cap to allow the PEPP to be successful.

EFAMA’s response to key elements of EIOPA’s proposals:

Fee cap o​f 1% on the Basic PEPP

• All costs should be fully transparent to create an open and competitive market that delivers the best possible outcomes for European savers. The fee cap should be designed in such a way as to facilitate the emergence of this new market, not undermine it.
• The proposal to include the cost of advice within the cap is likely to lead to the PEPP being commercially unviable. Evidence of the cost of personal pension products demonstrates that a 1% cap will be too low to accommodate advice. Hence, the ‘all-inclusive’ approach proposed by EIOPA would likely limit the number of providers, rather than encourage competition.
• Ultimately, if the majority of potential providers are unable to develop an economically viable business model for the PEPP, the personal pension market will remain largely dominated by existing providers -who may then continue to focus on national markets without providing any portability service.  Therefore, the goal of the PEPP to create a level playing field between existing providers and new entrants will not be met. Consequently, savers will not benefit from the expected benefits of the PEPP in terms of product choice, quality of advice and value for money. 
• EIOPA should structure the fee cap in a way which focuses on the cost of manufacturing, administration, distribution and portability, and excludes advice costs.  Once the dynamics of the new PEPP market are more clearly established, a review of the fee cap structure could be considered.  In the meantime, the advice cost should be fully disclosed to consumers, so that they can make informed decisions.  This would be the most efficient approach to allow the needed development of a large and competitive EU level market for personal pensions and ensure the PEPP delivers best value for money to EU savers.
• The exclusion of the guarantee costs from the cap appears to discriminate against providers of life-cycle strategies whose full costs are included within the cap.  Furthermore, it is not clear why a nominal guarantee should benefit from a more favourable regulatory treatment rationale than an investment strategy designed to delivery significant real-term growth over many years. 
• It is crucial that the cost charged for the capital guarantee be explicitly and separately disclosed in the PEPP KID and calculated according to a robust, clear and transparent methodology set out by EIOPA.  Without having a common methodology, NCAs would need to adopt their own criteria to assess the evidence provided by providers; this would lead to different standards at national level, which would erect barriers to the single market for the PEPP.
• ​The inclusion of transaction costs in the fee cap would limit the number of portfolio transactions, with the consequent risk of resulting in missed opportunities to make gains or limit losses.  This would be detrimental to PEPP savers, and unnecessarily complicate the investment process.

Risk-Mitigation Techniques

• EFAMA fully supports EIOPA’s proposal that PEPP providers should ensure that their investment strategy allows to recoup the capital at the start of the decumulation phase with a certain probability, taking into account the results of stochastic modelling.
• The probability thresholds should be set by EIOPA, taking account of the low-returns environment, in which the world seems to have set in, as well as the basic assumptions to be used for the necessary stochastic modelling.  Methodologies should not be overengineered and must assist advisers in explaining the product to customers.     

The PEPP KID

• PEPP documentation should be designed both to be digitally delivered and to be subject to rigorous customer testing, to ensure it provides robust but accessible information.
• A new methodology needs to be developed to inform savers about the risk riskiness of a PEPP, taking into account the age of the PEPP saver, and the different types of risks savers are facing – including investment, inflation and shortfall in relation to expected outcome.
• We strongly recommend not to confuse investors with a benchmark.   It might prove useful to link the presentation of past performance to the inflation rate, since maintaining the purchasing power of accumulated capital should be a minimum goal.
• We recommend to base performance scenarios on a stochastic basis to derive the probability distribution of the return at retirement. This would provide savers with a better understanding of the expected return or reward from selecting a given investment strategy.

Full response on EFAMA

© EFAMA - European Fund and Asset Management Association