There is much debate around suitable (default) investments within Pepp
Current plans for the Pepp ask for a limited set of options, and a well-crafted default option, likely to be used by most participants.
The big question is the matter of guarantees. Should the default option provide a full capital protection, potentially resulting in a smaller retirement fund and the risk that it would be inadequate to meet retirement income needs? Or should the default be aimed at providing optimal performance for the investment horizon?
Given the lack of consensus as to what the default option should be, there needs to be more room in the Pepp framework for personal, client-centric advice.
Consumer information and advice or self-service
The matter of advice is not addressed in the working paper and little has been said about this subject in the ensuing debates. However, there seems to be a general view that beyond the basic default option, advice should be available, but not seen to be a priority for smaller contributors. Fecif regrets this, especially as there is no consensus as to what an advice-free default option should look like.
It is arguable that Pepps should only be sold on an advised basis, even if the saver has chosen the default investment option – whether this be a real capital guarantee (not nominal) or a lifecycle investment option. The impact of national pension entitlements, varying decumulation options and retirement ages, particularly if the Pepp saver has cross-border accumulated benefits, strengthens the need for the Pepp saver to receive appropriate advice, regardless of the amount being saved.
As it stands, the Pepp project is at a crossroad. The (near) future will tell if it takes a step in the right direction, or on the road to nowhere.
As well as sitting on the Fecif advisory committee Simon Colboc is the founder of Mawen Asset Management and is a non executive director of Nucleus Life. This story was first published by Fecif.
