Documents considered by the Committee on 29 November 2017 Contents

12Pan-European Personal Pension Product (PEPP)

Committee’s assessment

Politically important

Committee’s decision

(a) Not cleared from scrutiny; further information requested; drawn to the attention of the Treasury Committee and the Work & Pensions Committee; (b) Cleared from scrutiny

Document details

(a) Proposal for a Regulation on a pan-European Personal Pension Product (PEPP); (b) Commission Recommendation on the tax treatment of personal pension products, including the pan-European Personal Pension Product

Legal base

(a) Article 114 TFEU; ordinary legislative procedure; QMV; (b) Article 292 TFEU

Department

Treasury

Document Numbers

(a) (38875), 10654/17, COM(17) 343; (b) (38897), 11009/17, C(2017) 4393

Summary and Committee’s conclusions

12.1Since 2012, the European Commission has considered the introduction of a new pan-European Personal Pension Product (PEPP),137 with the aim of providing consumers across the EU with a “simple, safe and cost-efficient” retirement product that can be sold from providers based anywhere in the Single Market. It finally tabled a legislative proposal in June 2017,138 aiming to introduce a standardised set of features for the PEPP (such as a default investment option and provision of information to potential customers), and noting its potential as a vehicle for unlocking additional capital for investment under the EU’s flagship “Capital Markets Union” initiative.139

12.2The proposal, which does not replace or harmonise existing national personal pension schemes, would enable—but not require—providers to create a personal pension product that meets the requirements set out in the Regulation. In effect, this creates a separate regulatory regime for PEPPs that will exist in parallel to any existing domestic regulations applicable to other personal pension products. The product could be sold at a distance from any EU country to a consumer in any Member State, with supervision provided by the regulator of the country where the provider is established.

12.3A key feature of the PEPP is meant to be its cross-border portability: the product would be portable throughout its lifecycle, so that consumers could keep saving into—or draw from—the product even if they move between Member States.140 However, the Commission has acknowledged that different approaches to taxation of personal pensions—including tax reliefs—across the EU can make portability very difficult in practice (see “Background” below). It has therefore issued a non-binding Recommendation,141 in which it calls on the Member States to ensure that PEPPs are subject to the same tax treatment as comparable personal pension products under domestic law.

12.4The Economic Secretary to the Treasury, Stephen Barclay, submitted an Explanatory Memorandum on the proposed Regulation in July 2017.142 His main conclusions were that there was “very little evidence of demand for a PEPP” in the UK, with providers unlikely to offer the product and little demand from British consumers. In addition, he saw “clear difficulties that need to be overcome of determining the tax status of such a product”, as well as “potential risks around regulatory arbitrage”.

12.5With respect to the Commission’s recommendation that Member States should apply the most favourable tax treatment available to the PEPP, the Minister is unequivocal that tax remains a domestic competence, and that Member States “must retain the right to refuse tax reliefs to the PEPP if it is clearly incompatible with the domestic pension system”.

12.6Overall, we are not satisfied that the proposal offers much added value for UK consumers, who already benefit from a well-developed domestic market for personal pensions. We also agree with the UK’s Financial Services Consumer Panel that the introduction of a parallel regulatory regime for PEPPs is unlikely to bring clarity to a market that many consumers already find confusing and complex.143 In cases of disputes between a saver and the PEPP provider, the former may have to deal with a regulator, compensation scheme or dispute resolution body based abroad.

12.7Given the above, we would like the Minister to clarify:

12.8The key difference between personal pension products currently on offer and the PEPP is supposed to be its portability between EU Member States. However, the divergent approaches taken throughout the EU to taxation of personal products is likely to complicate cross-border transfers and portability, as savers may see their contributions taxed twice or incur withdrawal charges when their pot is transferred to another Member State. The Commission’s non-binding Recommendation on tax treatment of PEPPs notwithstanding, many of these fiscal barriers are likely to persist and thereby limit cross-border portability. In turn, this would effectively reduce the proposal to the introduction of a parallel legal framework for a specific product on domestic markets, even where those markets are already well-developed and competitive. The “European added value” of such an initiative is questionable.

12.9While the Regulation is unlikely to enter into effect before the UK is set to withdraw from the EU in March 2019,144 the Government has confirmed that it is seeking certain “transitional arrangements” which would “minimise disruption” in UK-EU trade relations post-Brexit until a new free trade agreement enters into force. However, in absence of any concrete proposals from the Government as to how this would work in practice, or in which sectors it might apply, we can only refer to the European Council’s guidelines. The only option for a transitional arrangement they foresee is “a time-limited prolongation of Union acquis”, including the application of “existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures”.145 Until we have express confirmation from the Government to the contrary, we must therefore entertain the possibility that the PEPP Regulation—which has a Single Market legal base146could apply to the UK, at least during a transitional period after Brexit.

12.10As a result, even if domestic providers do not market PEPPs, firms established elsewhere in the EU could still target UK consumers while the Regulation was in force here. We urge the Government to use the Council’s scrutiny of the proposal to ensure that this legislation does not create new risks for UK consumers, and ask the Minister to keep us informed of any significant developments in the legislative procedure. In the meantime, we retain the proposal under scrutiny. We are content to clear the Commission Recommendation from scrutiny, and draw both documents to the attention of the Treasury Committee and the Work & Pensions Committee.

Full details of the documents

(a) Proposal for a Regulation on a pan-European Personal Pension Product (PEPP): (38875), 10654/17, COM(17) 343; (b) Commission Recommendation on the tax treatment of personal pension products, including the pan-European Personal Pension Product: (38897), 11009/17, C(2017) 4393.

Background

12.11In June 2017, the European Commission tabled a legislative proposal for a Regulation on a pan-European Personal Pension Product (PEPP),147 as well as a non-binding Recommendation on tax treatment of personal pension products, including PEPPs.148 This proposal has been under preparation for a long time, having first been mooted by the Commission as far back as 2012.149

12.12The general objective of the PEPP is to create the legal framework for a “simple, safe and cost-effective” new pension product, which enhances consumer choice—especially in EU countries with an underdeveloped domestic market—while also contributing to the completion of the Capital Markets Union (CMU) by unlocking capital for investment.

12.13The proposal is not intended to replace or harmonise existing national personal pension schemes, but complement them by adding a pan-EU framework for pensions for those who wish to use it as a saving option. The Regulation would enable—but not require—providers to create a personal pension product that meets the requirements set out in the Regulation, in effect creating a quality label for PEPPs. A firm would only be able to provide a PEPP product where it has been authorised to do so by the European Insurance & Occupational Pensions Authority (EIOPA) in Frankfurt.

12.14The unique feature of the PEPP is that it is designed specifically with the Single Market in mind. It can be sold at a distance from any EU country to a consumer in any Member State. The provider will be subject to supervision by the competent authority of the country of establishment, and not by the authorities of each Member State where it sells the product.150 Moreover, the PEPP will be portable throughout its lifecycle: the consumer can continue to save into, or draw from, the product even if they move to another Member State. The mechanism behind the portability service envisages the provider opening a new “compartment” within the individual PEPP account, which corresponds to domestic legal and taxation requirements for the PEPP in the new Member State of residence.

12.15The draft Regulation sets out both standardised requirements to qualify for the PEPP label, which include:

12.16Other elements of the PEPP, notably its treatment under domestic tax law, are left to each individual Member State. The Commission acknowledges that tax incentives for personal pensions (such as tax relief on contributions, and often lower rates of tax income from those pensions at retirement) take many different forms across the EU. However, in a separate, non-binding recommendation, the Commission calls on Member States to ensure that PEPPs should be subject to the same tax treatment as other personal pension products, even if they do not fulfil all the national criteria for tax relief.

12.17An Ernst & Young study151 conducted on behalf of the Commission concluded there would be a significant increase in assets under management in the personal pension product market across the EU (increasing by €1.4 trillion (£1.29)152 to €2.1 trillion (£1.93) by 2030 if the PEPP is introduced, versus a growth of €0.7 trillion (£.64) without the PEPP).153 However, that estimate relies on the assumption that tax incentives are granted to the PEPP, which is unlikely to happen in all Member States. With respect to individual consumers, the Commission notes that “the positive social impact would be higher in Member States with a limited choice and limited take-up of personal pension products at present”.

The Government’s view

12.18The Economic Secretary to the Treasury, Stephen Barclay, submitted an Explanatory Memorandum on the proposed Regulation and the Recommendation on taxation in July 2017.154 He notes that the Government could support a product such as the PEPP that “complements, rather than harmonises, existing domestic pension regimes”. However, he adds that there are “clear difficulties that need to be overcome of determining the tax status of such a product and the potential risks around regulatory arbitrage”.

12.19With respect to potential take-up of the PEPP by consumers in the UK (should the Regulation apply to the UK, given its planned withdrawal from the EU), the Minister says that the Government has seen “very little evidence of demand for a PEPP sufficient to warrant the expense of setting up and maintaining a regulatory framework”. He adds:

“There is already a strong market in private pensions in the UK, with a wide range of products to choose from, so at the present time there is unlikely to be much demand from British consumers. As the PEPP is an optional product, domestic providers may well choose not to offer it, especially in the context of the UK’s exit from the EU.”

12.20With respect to the Commission’s recommendation that Member States should apply the most favourable tax treatment available to the PEPP, the Minister says:

“The UK remains opposed to the principle of tax in non-tax areas of EU policy, but accepts that this is only a Recommendation rather than a legislative proposal. Tax is a national competency and Member States must retain the right to refuse tax reliefs to the PEPP if it is clearly incompatible with the domestic pension system.”

12.21The Minister also expresses concerns about the proposal’s compliance with the subsidiarity principle. He notes that personal pension products are currently available in all Member States. Moreover, in the UK, it is already possible to transfer pension pots held overseas through the existing Qualifying Recognised Overseas Pension Scheme (QROPS) system, “suggesting a single market for pensions is already feasible without EU level action”. The underlying products that domestic pensions are invested in can also already achieve the aim of increasing funds available for long-term investment across the EU.

Our assessment

12.22The Commission’s proposal for a pan-European personal pension product has long been in the making, but whether it can achieve its objectives—and therefore whether there is added value in the proposed Regulation—remains unclear.

12.23We agree with the Minister that the potential usefulness of the proposed PEPP in the UK, with its well-developed market for pension products, appears to be limited. The UK’s planned withdrawal from the EU reduces its potential utility to UK savers further, although we cannot yet rule out the possibility that the UK will be bound by Single Market legislation—including this Regulation if adopted—for at least a transitional period post-Brexit (see paragraph 12.32 below).

12.24Even so, it seems unlikely many UK-based providers would add it to their existing product portfolios for the domestic market. The Regulation provides no incentive for firms to market the PEPP other than the use of its “quality label”. Based on the limited progress achieved in the UK under the 2013 “Simple Products” initiative155 and the introduction of Stakeholder Pensions in the early 2000s,156 we are sceptical that the legislative framework as proposed will provide sufficient incentive for firms to produce or distribute PEPPs for the UK market.

12.25We also note that the Commission states explicitly that the proposal “aims to channel more household savings away from traditional instruments, such as savings deposits, towards the capital markets”. We would observe that, from a consumer’s perspective, savings deposits may be less potentially lucrative than investments, but they are also less risky. The Financial Services Consumer Panel, which advises the Financial Conduct Authority on consumer protection issues, warned EIOPA in 2015 that the most important feature of a pension product should be the value it offers to the saver, which “should never be a secondary consideration to the use of capital generated by these products”.157

12.26Moreover, we agree with the observation by the Panel that the introduction of a parallel regulatory regime for PEPPs, alongside the domestic rules applicable to other pension products, is unlikely to bring clarity to a market that many consumers already find confusing and complex.158 In cases of disputes between the saver and the PEPP provider, the former may have to deal with a regulator, compensation scheme or dispute resolution body based abroad. It also appears that there is no requirement for contributions to a PEPP to be protected by an investor protection or insurance guarantee scheme if the provider goes insolvent.

12.27Given the above, we would like the Minister to clarify:

Taxation of PEPPs

12.28The key difference between personal pension products currently on offer and the PEPP is supposed to be its portability between EU Member States. The Commission says the proposal would “lead to consumers having greater choice”, and address the fact that there is currently “hardly any cross-border activity by suppliers or savers”. As both the Commission and the Minister have noted, however, the major obstacle to the cross-border provision and portability of any personal pension product is taxation.

12.29Across the EU, there are many different approaches to the level and timing of tax on personal pensions, as well as various ways of providing tax relief to incentivise consumers to save for their retirement.159 This can complicate cross-border transfers in a myriad of ways. For example, certain EU countries classify a transfer of an investment (such as accrued pension entitlements) abroad as a withdrawal and tax it accordingly, discouraging cross-border portability; moreover, other Member States may tax a transfer on entry, creating the risk of double taxation. Both EIOPA160 and industry stakeholders161 have identified numerous examples of national tax systems impeding a Single Market for pensions.

12.30In an attempt to address these fiscal barriers, the Commission has asked Member States to ensure that the most favourable tax treatment available to domestic personal pension products is also applied to PEPPs. This Commission proposal is, rightly, contained in a non-binding Recommendation. Member States remain best placed to determine the manner and timing of taxation of such products, based on the specificities of their domestic market. However, in the absence of a harmonised approach to taxation of the PEPP, it is difficult to see how the tax-related obstacles described by both EIOPA and pension providers could be overcome. This will severely limit cross-border portability.

12.31Portability of the PEPP between Member States is one of the Commission’s three objectives for the proposal. If divergent tax regimes hinder the viability of the portability element, the proposal amounts to the introduction of a parallel legal framework for a specific product on domestic markets, even where those markets are already well-developed and competitive. The other objectives of the PEPP—unlocking capital through increased investment in retirement products, and offering “simple, safe and cost-efficient” pension products—do not necessarily warrant EU intervention. We therefore question if there is much “European added value” in the proposal.

Implications of Brexit

12.32Under the terms of the proposal, even if UK providers do not market PEPPs to domestic consumers, firms established elsewhere in the EU could still target the UK market. While the Regulation is unlikely to enter into effect before the UK is set to withdraw from the EU in March 2019,162 we do not have any clarity from the Government about the timescale for our actual, practical extrication from the Single Market and its acquis.

12.33Notably, the Government has confirmed that it is seeking a transitional arrangement which would “minimise disruption” in various areas of UK-EU trade relations post-Brexit until a new free trade agreement enters into force.163 However, in absence of any concrete proposals from the Government as to how this would work in practice, or in which sectors it might apply, we can only refer to the European Council’s guidelines for the Article 50 negotiations. The only option for a transitional arrangement they foresee is “a time-limited prolongation of Union acquis”, including the application of “existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures”.164

12.34Until the Government is clear about the nature of a transitional arrangement it would be prepared to accept, we are unable to conclude whether the UK might be bound by current and future Single Market legislation—which would include the PEPP Regulation, which has an internal market legal base165—during a transitional period after Brexit. We therefore urge the Government to use the Council’s scrutiny of the proposal to ensure that the final Regulation will not pose new risks to UK consumers.

12.35In the meantime, we retain the proposal for a Regulation under scrutiny. We are content to clear the Commission Recommendation from scrutiny, and draw both documents to the attention of the Treasury Committee and the Work & Pensions Committee.

Previous Committee Reports

None.


137 In July 2012, the European Commission asked the European Insurance & Occupational Pensions Authority (EIOPA) for technical advice on the creation of an “EU Single Market for personal pension schemes”.

139 An Ernst & Young study conducted on behalf of the Commission concluded there would be a significant increase in assets under management in the personal pension product market across the EU (increasing by €1.4 trillion (£1.29) to €2.1 trillion (£1.93) by 2030 if the PEPP is introduced, versus a growth of €0.7 trillion (£.64) without the PEPP). However, that estimate relies on the assumption that all applicable tax incentives are granted to the PEPP.

140 The mechanism behind the portability service envisages opening a new “compartment” within the individual PEPP account, which corresponds to domestic legal and taxation requirements for the PEPP in the new Member State of residence.

141 Commission Recommendation of 29.6.2017 on the tax treatment of personal pension products, including the pan-European Personal Pension Product.

142 Explanatory Memorandum submitted by HM Treasury on 14 July 2017.

144 Article 50 TEU, under which the UK has notified its withdrawal, provides for a two-year period before cessation of membership takes effect. Following the Government’s formal notification on 29 March 2017, that period expires on at midnight on 30 March 2019.

145 European Council, “Guidelines for Brexit negotiations“ (29 April 2017).

146 The legal base for the proposed Regulation is Article 114 TFEU, which gives the EU competence to “adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market”.

149 In July 2012, the European Commission asked the European Insurance & Occupational Pensions Authority (EIOPA) for technical advice on the creation of an “EU Single Market for personal pension schemes”.

150 The same principle applies to the depositor guarantee scheme or investor compensation scheme that protects consumers if the PEPP provider defaults.

152 €1 = £0.91973 or £1 = €1.08728 as at 1 September 2017.

153 A 2015 survey by EIOPA on personal pension products in the European Economic Area, found that the UK, together with the Netherlands and Belgium, accounted for almost 77% of all reported assets under management for personal pensions. The UK also had the second highest number of consumers with a personal pension scheme (behind Germany).

154 Explanatory Memorandum submitted by HM Treasury on 14 July 2017.

155 HM Treasury, “Simple financial products“ (April 2013). The only product that appears to have been certified as “simple” under this initiative was a fixed-term life insurance policy. In 2017, it was reported that the Association of British Insurers had abandoned the initiative altogether.

156 The Pensions Advisory Service, “Stakeholder pension schemes“ (accessed 27 July 2017). Although as a product the Stakeholder Pension has been mostly superseded by auto-enrolment into occupational pension schemes from 2012 onwards, the product’s moderately successful uptake was attributed mostly to a regulatory requirement (known as RU64), which only permitted advisers to sell a personal pension more complicated and costly than a Stakeholder Pension if they could explain how the additional costs were justified by the added benefits.

159 For example, most Member States—including the UK—apply the “exempt, exempt, taxed” (EET) principle, whereby contributions into a pension product, and accumulation through investment, are free of tax but any withdrawals in the decumulation stage are subject to taxation.

160 See EIOPA’s advice to the European Commission, p. 58 (July 2016).

161 The responses to the European Commission’s consultation on the PEPP are available here.

162 Article 50 TEU, under which the UK has notified its withdrawal, provides for a two-year period before cessation of membership takes effect. Following the Government’s formal notification on 29 March 2017, that period expires on at midnight on 30 March 2019.

163 See for example the Government’s position paper on “future customs arrangements” or the Treasury’s position on the role of UK-based central counterparties in clearing derivatives transactions across the EU.

164 European Council, “Guidelines for Brexit negotiations“ (29 April 2017).

165 The legal base for the proposed Regulation is Article 114 TFEU, which gives the EU competence to “adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market”.




1 December 2017