Documents considered by the Committee on 11 July 2018 Contents

3Pan-European Personal Pension Product (PEPP)

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; scrutiny waiver granted for the ECOFIN Council of 13 July 2018; drawn to the attention of the Treasury and Work & Pensions Committees

Document details

Proposal for a Regulation on a pan-European Personal Pension Product (PEPP)

Legal base

Article 114 TFEU; ordinary legislative procedure; QMV



Document Number

(38875), 10654/17 + ADDs 1–2, COM(17) 343

Summary and Committee’s conclusions

3.1In summer 2017, the European Commission proposed a new legal framework for a pan-European Personal Pension Product (PEPP) 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.

3.2The proposed PEPP Regulation does not replace or harmonise existing national personal pension schemes, and 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. A 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. However, it does not contain any rules on the taxation of the product, given the varying approach to tax on retirement incomes across the European Union and the need for unanimity among all Member States to agree EU tax law under the Treaties.15

3.3The then-Economic Secretary to the Treasury (Stephen Barclay) submitted an Explanatory Memorandum on the proposed Regulation in July 2017. 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”.

3.4The European Scrutiny Committee considered the proposal when it was re-constituted following the last general election, in November 2017. We expressed scepticism about the added value of the PEPP product offer for the UK, given its well-developed domestic market for private pensions, and echoed concerns by the Financial Services Consumer Panel that the introduction of a parallel regulatory regime for PEPPs was “unlikely to bring clarity to a market that many consumers already find confusing and complex”. We also took the view that the divergent approaches to tax of pension products between EU countries was likely to decrease the product’s attractiveness as a portable product.16 Despite the UK’s decision to leave the EU, we retained the proposal under scrutiny given that the new Regulation could apply to the UK under the terms of the proposed post-Brexit transitional arrangement.17

3.5On 29 June 2018, the Economic Secretary (John Glen) provided the Committee with an update on the state of play on the PEPP proposal. He explained that Member States in the Council had made progress in their deliberations on the file, and were expected to vote on a common negotiating position—a ‘general approach’—for talks with the European Parliament on the final text of the Regulation at a meeting of EU Finance Ministers on 13 July.

3.6According to the Bulgarian Presidency of the Council,18 the “most controversial” issue during the negotiations was the question of which type of company would be allowed to provide PEPPs. A number of countries, including the Netherlands,19 opposed the possibility of allowing workplace pension schemes—called institutional occupational retirement providers (IORPs) in EU law—to offer the new private pension product.20 As a compromise, providers of workplace pension schemes will only be able to offer PEPPs if authorised to do so by domestic law.21 In addition, even in Member States where IORPs will be allowed to offer the new product, they cannot independently cover biometric risk but have to use an insurer to do so (since workplace schemes are based on mutualisation of risk, with no variation in contributions to or payments from the scheme based on an individual worker’s health or life expectancy).22 Under the Council text, banks, asset managers and life insurers will also be able to offer PEPPs.

3.7The Council also wants to amend the PEPP proposal to:

3.8The changes proposed by the Council are not yet binding. They must still be approved by the European Parliament, and further amendments to the legal text of the PEPP Regulation are therefore likely. The Parliament’s Economic and Monetary Affairs Committee (ECON) is due to adopt its negotiating position on 11 July 2018, with trilogue talks to follow after the 2018 summer recess. However, it is not clear when the final legislation may be adopted (and consequently when it would take effect, which would be two years after publication in the EU Official Journal). Whether the UK would still be covered by the Regulation will depend on the timing of its adoption and, consequently, whether it becomes applicable before the end of the proposed post-Brexit transitional period.23

3.9We thank the Minister for the very helpful information he has provided on the state of the negotiations on the pan-EU personal pension proposal. We remain concerned about the potential consumer protection implications of the introduction of the PEPP into the UK’s well-developed pensions market, especially given the ‘passporting’ provisions that will allow firms from outside the UK to offer the PEPP directly to UK consumers. However, we welcome the insertion by the Council of a provision allowing a ‘host’ country for a PEPP to ban a provider registered in another EU country if necessary, given our concerns about the conduct risks of UK consumers purchasing a private pension product from an overseas company. We are content to grant the Minister a scrutiny waiver to support a general approach at the ECOFIN meeting on 13 July.

3.10As we noted in our previous Report on the PEPP, the exact implications of the proposal—for UK companies that may wish to offer the product, and for consumers who might be offered to invest in one—remain unclear. The Government has said it expects demand in the UK to be low. Depending on progress in the UK’s EU exit negotiations and the timetable for adoption of the PEPP Regulation, the legislation could however take effect while the UK’s post-Brexit transitional arrangement (requiring the Government to continue to apply EU law) is still in operation. We therefore retain the proposal under scrutiny and ask the Minister to keep us informed of any future developments in the trilogue negotiations with the European Parliament. We also draw the changes to the legal text to the attention of the Treasury and Work and Pension Committees.

3.11We also note that there are broader implications of Brexit for the UK’s insurance and pensions industry, particularly as regards cross-border contracts which do not mature until after the UK leaves the EU but which may become legally impossible to service once UK firms become ‘third country’ operators for the purposes of EU financial services legislation. When he gave evidence to us on 13 June 2018, the Economic Secretary told us that the Government was “ready to implement whatever statutory instruments or regulatory arrangements we need to in the case that no deal is the outcome”. However, he declined to specify what those would be in for cross-border contracts where the UK, by default, cannot act unilaterally. A week later TheCityUK, a financial services industry body, reiterated that a joint UK-EU solution would be necessary to avoid legal chaos and financial hardship for affected individuals.

3.12We remain concerned about the lack of clarity from the Government about the details of its contingency planning in the event of a ‘no deal’ Brexit, especially in cases —as is the case for cross-border pension and insurance provision—where the UK cannot unilaterally mitigate the consequences of leaving the Single Market and the Customs Union.

Full details of the documents

Proposal for a Regulation on a pan-European Personal Pension Product (PEPP): (38875), 10654/17 + ADDs 1–2, COM(17) 343.

Previous Committee Reports

See (38875), 10654/17, COM(17) 343: Third Report HC 301–iii (2017–19), chapter 12 (29 November 2017).

15 Instead of proposing binding rules on the taxation of PEPPs, the European Commission issued a non-binding recommendation calling on Member States to apply the most favourable tax treatment available to the PEPP.

16 In particular, it cannot be ruled out that contributions could be subject to double taxation when a pension pot is transferred between Member States.

17 The draft Withdrawal Agreement contains a transitional arrangement, scheduled to last until 31 December 2020, during which the UK would remain subject to EU law as if it had remained a Member State.

18 See for more information the Presidency progress report (Council document 9975/18).

20 Workplace schemes, called the ‘second pillar’, are mandatory in the Netherlands on a sectoral basis and as a result of the companies that provide each sector’s retirement scheme have a guaranteed client base. This would give them an unfair competitive advantage over other providers if they could also offer private (‘third pillar’) retirement products, with the potential for cross-subsidy that makes it difficult or impossible for other market players to compete.

21 Where allowed by national law, the provider would also have to ring-fence assets and liabilities related to their ‘second pillar’ offering.

22 Second pillar products, for example in the Netherlands, are covered by mutualisation of risk rather than individual premiums.

23 The current draft of the Withdrawal Agreement provides for a transitional arrangement lasting until 31 December 2020, during which the UK would continue applying EU law and therefore stay part of the Single Market and the Customs Union. The Secretary of State for International Trade (Dr Liam Fox) told Sky News on 24 June 2018 that he would not be opposed to an extension of the transitional period beyond that date in certain circumstances.

Published: 17 July 2018