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The proposed scheme looks set to open up the retirement market
July 2019, LONDON - Asset managers stand to benefit from the European Commission’s proposal for a new pension product to complement public and occupational pensions, but size could be a key factor in determining where this new business goes, according to the latest The Cerulli Edge—Global Edition.
The pan-European personal pension product (PEPP) is a voluntary scheme designed to ensure adequate consumer protection while also being flexible. The PEPP regulation establishes the legal foundation for a pan-European personal pension market by ensuring standardization of core product features such as transparency requirements, investment rules, switching rights, and types of investment options.
“Asset managers are broadly optimistic that the PEPP is a positive development,” says Justina Deveikyte, associate director, European institutional research at Cerulli Associates, a global research and consulting firm.
A Cerulli survey of European asset managers found that only 5.9% of respondents do not believe the PEPP offers growth opportunities. A survey conducted by the European Fund and Asset Management Association found that 7.7% of respondents are similarly unconvinced by the product’s potential.
When incentives are taken into account, estimates suggest that the PEPP could account for one-third of personal pension product assets under management in the EU by 2030 and that the overall market could be worth three times the €700 billion (US$788 billion) it was valued at in 2017. Data from the European Insurance and Occupational Pensions Authority indicates that only 27% of EU citizens aged 25–59 have a voluntary personal pension plan.
Deveikyte notes, however, that the success of the product will be clear only when the implementing measures are in place and there is clarity on what will be included in the 1% fee cap of a basic PEPP. It is not known when these details will be announced. The first products are expected to be available by the end of 2021.
The makeup of the fee cap will determine the balance between passively and actively managed solutions. Also, at present it is not clear how fund managers will find distributors willing to offer the PEPP if the 1% fee covers both advice and distribution costs.
Passive funds are likely to be at the core of the PEPP due to the cost advantages, with active strategies and alternatives being used to add alpha or create different style tilts. Deveikyte says there is an expectation that passive funds may be offered for free or for a minimal amount, with higher fees being charged for advice related to active fund management, taxation, and asset class comparison.
She notes that, to capitalize on the new system, managers will need to achieve scale quickly. “Distribution is likely to be dominated by life and pension companies, independent financial advisors, and multinationals. However, it is a space ripe for disruption, with quick and nimble online wealth management providers likely to have an advantage over incumbent providers.”
• Financial wellness programs have attracted praise and censure from stakeholders in the U.S. retirement market. However, notes Cerulli, advances in the services associated with these programs are becoming increasingly integral to the way plans engage participants—including both debt-conscious younger generations and older savers planning for retirement income streams.
• Many Asian pension funds are only beginning to allocate to responsible investments, with several still taking a wait-and-see approach. However, some large funds are starting to emerge as environmental, social, and governance investment leaders in the region, and Cerulli believes that their example may prompt other pension funds to start investing responsibly.
NOTES TO EDITORS:
These findings and more are from: The Cerulli Edge—Global Edition, July 2019 Issue.
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