THE PANEUROPEAN PERSONAL PENSION PRODUCT PEPP Josina Kamerling

THE PAN-EUROPEAN PERSONAL PENSION PRODUCT (PEPP) Josina Kamerling, Head of Regulatory Outreach, EMEA CFA Institute Brussels, 31 January 2018 EPP Hearing on the Pan-European Personal Pension Product © 2018 CFA Institute. All rights reserved.

SETTING THE SCENE • "l have worked and saved for my pension in several Member States. The PEPP will make it easier to work across the EU and save in one personal pension plan. ”* • There always tensions within the design of any pension system. A critical example is the tension between the provision of adequate benefits to retirees whilst at the same time ensuring that the system is sustainable over the longer term. • Access to a capital sum at, or during, retirement can be very beneficial. This capital sum may be needed for a variety of purposes. It is therefore recommended that within an ideal retirement system a portion of the accumulated benefit (say between 20% and 40%) should be able to be accessed during the retirement years. *Source: European Commission fact sheet, “A Pan-European Personal Pension product 2

ORGANISATIONAL GAME CHANGERS: LOWER FOR LONGER SCENARIO • New normal low interest rates and returns become embedded for the foreseeable future (5– 10 years), accentuated by lower levels of global growth and higher levels of political instability; • This scenario leads to a combination of lower numbers of young people to support the pensions of older generations and lower returns on capital; • Various factors can be used to manage the worst effects, such as lengthening the retirement age, and a reduction of benefits where they can be achieved; • Impact on Investment organisations of the Lower for Longer Scenario: - Too much supply of capital (caused by too low interest rates) combines with slowing demand for capital because of aging demographics in the developed world, resulting in prolonged and slow economic growth; - When the pie is not growing, the whole finance sector struggles; institutional flows into pension funds are curtailed as pension savers recognize the deterioration in outcomes that are likely in a condition of financial repression; - Leadership is critical in adverse circumstances; strife around global entitlements, including pensions, is likely, so asset owners will need to renegotiate terms with beneficiaries, and set proper expectations for the future. 3

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BREAKDOWN BY MEMBER STATE 5

CFA SOCIETY GERMANY ON PRIVATE PENSION MODELS • CFA society Germany is convinced that the strong demand for private pension arises from ever more variable working biographies (e. g. , changing employers and between periods of selfemployment and dependent employment, as well as taking leaves for family matters and education); • CFA society Germany - like other Western democracies - faces enormous demographic challenge, which limits state-provided pension levels and requires more private (and employerdriven) pension provision in order to prevent old-age poverty; • CFA society Germany has identified manifold potential improvements for existing state-run and employer-driven pension models. These are the main elements: - broadening the range of investment possibilities and instruments (which also helps against low interest rates); - cutting back on misleading incentives for sales people who advise clients on pension products; - pension investors need more transparency and better reporting regarding costs, asset allocation, risk and return of their investments; - Dependencies on product providers and employers are to be lowered, so that pension investors do not lose a lot of pension money when switching employers of investment schemes; - A reduction of complexity, especially with regard to tax issues around pension provision, is necessary; - Also, more flexibility is required when taking out pension money prematurely, e. g. , in case of predefined severe health conditions, or when needed for purchasing one's own house. 6

AN IDEAL RETIREMENT SYSTEM • There should be cost-effective and attractive default arrangements, both before and after retirement, for individuals who do not wish to make decisions; • The overall costs, including administration and investment, of each pension arrangement should be disclosed with some competition also present within the system to encourage fair pricing; • The retirement system must have some flexibility as individuals live in a range of personal and financial circumstances. This flexibility includes recognizing that retirement will occur at different ages and in different ways across the population; • The benefits provided from the system during retirement should have an income focus but permit some capital payments or withdrawals during retirement, but without adversely affecting overall adequacy; • Contributions (or accrued benefits) at the required minimum level must have immediate vesting and portability, These accrued benefits should only be accessible under certain conditions, such as retirement, death or permanent disablement; • Governments should provide taxation support to the funded pension system in an equitable and sustainable way, thereby providing incentives for voluntary savings and compensating individuals for the lack of access to their pension savings. Source: Mercer, CFA Institute (2015), An Ideal Retirement System 7

Commission proposal CFA Institute’s view Authorisation of PEPP providers need authorisation by EIOPA. Only financial undertakings already authorized at EU level by NCAs would be eligible to apply for authorisation to provide PEPP. Supervision is divided between EIOPA and NCAs. CFA Institute agrees that EIOPA should authorise PEPP providers. This will ensure regulatory consistency and supervisory convergence. Portability Opening a new compartment within each individual PEPP account. During the first three years of application of the Regulation, PEPP providers will have to provide information on the available compartments. Afterwards, PEPP savers will be entitled to open national compartments that cover all Member States’ regimes. We acknowledge that he main barrier to portability of existing products is t represented by the differing tax regimes in MS, Uniformity in tax regimes is a prerequisite to portability. The opening of compartments will mitigate the tax barrier, but at the same time could be very cumbersome from the administrative point of view. Transparency PEPP providers shall give pre-contractual information contained in a KID. The provider must produce a “PEPP Benefit Statement”. This will include information on the accrued entitlements or accumulated capital, full or partial guarantees under the PEPP scheme, and, if applicable, the nature of the guarantee and mechanisms to protect accrued individual entitlements. CFA Institute agree on having pre-contractual information contained in a KID. The use of a “PEPP Benefit Statement” would avoid unnecessary duplication of disclosures, and should be used. Switching Following a request by the PEPP saver, any positive balance will be transferred from a PEPP account held with the transferring provider to a new PEPP account opened with the receiving provider, and the former PEPP account will be closed. The PEPP saver may switch PEPP providers no more frequently than once every five years after conclusion of the PEPP contract. We believe that switching is an essential part of free market as it ensures open competition. However, introducing a time horizon for the possibility to switch products would prevent this product from being extremely costly for PEPP providers. Decumulation phase PEPP savers and beneficiaries have the freedom to contractually determine the form. CFA Institute agrees on the flexibility on payout, and allowing savers to select an option. 8

KEY INFORMATION DOCUMENT (KID) Pension plans within the ideal retirement system should communicate with their members in many ways and many forms but these should include the following: • The provision of easy-to-understand information about the plan’s benefits upon joining the plan; • A regular member statement, preferably twice a year, setting out the member’s accrued benefits; • A benefit projection each year that shows the likely retirement income for the member, based on the latest data relevant to that individual; • An annual report about the pension plan, including information about the plan’s recent performance and investments. • The Statement of Investor Rights, prepared by the CFA Institute, contains several principles that are also applicable for pension scheme members. These include honesty, objective advice, fair treatment, the disclosure of conflicts of interest, clear communication as well as confidentiality. • Need for fair and transparent disclosure of past performance (this would facilitate comparison of PEPPs). 9

CFA INSTITUTE STATEMENT OF INVESTOR RIGHTS 1. Honest, competent, and ethical conduct that complies with applicable law; 2. Independent and objective advice and assistance based on informed analysis, prudent judgement, and diligent effort; 3. My financial interests taking precedence over those of the professional and the organisation; 4. Fair treatment with respect to other clients; 5. Disclosure of any existing or potential conflicts of interest in providing products or services to me; 6. An understanding of my circumstances, so that any advice provided is suitable and based on my financial objectives and constraints; 7. Clear , accurate, complete, and timely communications that use plain language and are presented in a format that conveys the information effectively; 8. An explanation of all fees and costs charged to me, and information showing these expenses to be fair and reasonable; 9. Confidentiality of my information; 10. Appropriate and complete records to support the work done on my behalf. 10

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