It comes as the EU’s pension body – European Insurance and Occupational Pensions Authority’s (Eiopa) – laid out plans earlier this year on how to create a pan-European pension product (Pepp).
Aimed at tackling the pensions crisis facing many European nations, the Pepp has been designed to encourage more people to save into a standardised cross-border private pension.
Similar to stakeholder pensions, which were introduced by the UK government in 2001, the product will include features such as a cap on fees, the ability to switch products and providers and default ‘core’ investment and limited investment choices.
“The danger with a cap on costs and fees, meaning commissions as well, is that intermediaries will not sell something unless they are well paid. Look at the underwhelming success of stakeholder pensions in the UK.” Micheal Lodhi, chairman of Luxembourg-based Spectrum IFA Group, told International Adviser.
“The danger with a cap on costs and fees, meaning commissions as well, is that intermediaries will not sell something unless they are well paid."
In 2003, the Association of British Insurers (ABI) labelled stakeholder pensions “a massive failure”, after research found that 80% of the 350,000 schemes set up were “empty boxes”, while just 13% included employer contributions.
The organisation said this was a result of the 1% cap imposed by the government on the amount insurers could charge for managing the pensions, with tight margins preventing financial advisers and insurers from advising employees at small companies to take up a pension.
Harmonised tax treatment
Although a cap on fees may be a “great idea”, said Lodhi, harmonised tax treatment is far more important. He also urged the EU to guarantee clients “certainty” that tax treatment on Pepps will be fixed at time of purchase.
Eiopa’s guidelines recommend that the product be governed by its own laws – dubbed the ‘second’ regime – to sit alongside regulatory systems that already apply to personal pension products (PPP).
Last month, the proviso was slammed by Insurance Europe, the trade body that represents the European insurance and reinsurance industry, as “poorly designed”.
It argues that it is unnecessary to create a new set of laws for Pepps as existing legislation would be adequate. It also criticised the proposed ‘second regime’, explaining that it does not account for popular product features such as profit-sharing tools or surrender options.
Annuities
Lodhi, whose firm advises expats across Europe, warned that the EU’s plan to link Pepps to annuities shows a “complete lack of understanding of current interest rates and bond markets”.
“Consumers will not buy them unless returns are linked to base interest rates and inflation proofed,” he said.
Efama
In April, the European Fund and Asset Management Association (Efama) urged the EC to push ahead with plans to create a Pepp – as part of a wider intitiative to form a single market for all financial retail products.
The organisation, which represents the investment management industry in Europe, announced that although it “strongly supports” moves by the EU to make financial products such as mortgages, life insurance and investment funds available to all consumers across the continent at the same price, it urged the body to go further and introduce a standardised cross-Europe personal pension vehicle.
