THE story of the European Union is in part that of the steady accretion of power by its central bodies.
Until now, though, the politically touchy business of running pensions has, like taxation, been zealously guarded by national governments. No longer: On June 29 the European Commission presented a longawaited proposal for a “pan-European personal-pension product,” the snazzily nicknamed “Pepp.”
Any attempt to encourage Europeans to make adequate provision for their old age is welcome. The combination of aging populations, falling birth rates and generous state pensions could leave future generations footing the bill, unless people work for longer. Especially in countries such as Greece and Italy, where the state is the main pension provider, encouraging people to make personal savings for their retirement would be sensible.
Europe’s pension landscape is fragmented. In some countries citizens have plenty of products to choose from, while in others they have few. A patchwork of European and national rules, and divergent tax treatments, has meant that pension pots tend to sit in national silos. The commission hopes that the new products will both help savers and provide an extra pot of money to boost investment in Europe. Indeed, the commission reckons that today’s total personal-pensions savings of $794 billion could exceed $2.25 trillion by 2030, of which $794 billion would be in Pepps alone.
The idea is that a Pepps trademark would provide reassurance about the quality of these products, which could be sold by insurers, pension funds, asset managers and banks across the EU. That should bring increased cross-border competition, leading to simpler and cheaper products for savers. The pensions would be portable, making it easier to continue to save for someone who changes jobs, countries or both. Consumers would have more choice than they do today and providers could fish in a pond of 240 million, the estimated size of the EU’s working-age population.
Critics think that the idea falls short of what is needed. Pepps merely broaden what is available to those choosing voluntary, private savings plans. Collective and semi-mandatory plans are arguably more important, but are not touched. In countries that rely heavily on state-funded pensions and where traditions of saving for retirement are weak, these products might make little difference.
Tax treatment also could prove a hurdle. The commission can merely recommend, not mandate, that Pepps be afforded the same favorable tax treatment that governments give to their own national products.
For now Pepps are most likely to appeal to a limited number of groups, such as mobile professionals, the self employed and those living in underserved markets, notably in eastern Europe. The announcement is, however, a victory for the EU’s “capital markets union” (CMU), a project to reduce European dependence on bank finance and to ease the flow of capital across the continent.
Much of the progress so far on CMU—such as liberalizing rules for venture-capital funds and making it easier for small companies to list on stock exchanges—counts for less without new pools of capital to tap into. Pepps amount to the first initiative to create a brand-new source of funds. The CMU was conceived, at least in part, as a way to bind continental Europe’s markets closer to Britain’s. After the Brexit vote the need to develop a pan-European capital market seems more important than ever. Pepps may do a bit to help.
© 2017 Economist Newspaper Ltd., London (July8). All rights reserved. Reprinted with permission
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