Should it meet all of these criteria, what would we expect the effect of the PEPP to be?
First, people would save more and this would complement the savings in the occupational pension schemes and help to bridge the pension gap in Europe.
Second, it would play a big part in getting people to shift some of their savings out of bank accounts and into a product that will be higher yielding as a result of competition, lower costs and economies of scale.
Third, the overall effect of this would be to greatly improve the sustainability of the pension system, not least through the encouragement it would give to Europe's young people to start saving as early as possible. By doing so, they will harness the power of compounding, which, over a period of 30 to 40 years, is considerable.
Fourth, a burgeoning savings scene can help provide the funds needed to finance economic growth in Europe. In this way, the PEPP would strengthen the Capital Markets Union, the flagship commission project to develop a more diversified financial system complementing bank financing with deep and developed capital markets.
The legislative proposal for the PEPP confirms the commission shares our vision. This is why EFAMA and the investment management industry broadly support the regulatory framework put forward by the commission.
We are still analyzing the proposal in detail, and we will make suggestions on specific points. In the meantime, I can say that there is an important element of the PEPP proposal that will need to be clarified if the PEPP is to deliver its full beneficial impact: the default option.We agree the default option should aim at providing the PEPP saver with a high level of capital protection, using risk-mitigation techniques that result in a safe investment strategy. This does not mean, however, that all providers should be required to offer a default option with a minimum return or capital guarantee. Indeed, mandating these sorts of guarantees would restrict the access of the PEPP market to insurers and therefore severely limit the positive impact of the PEPP on competition among providers, on product choice and on cost. In addition, the obligation to provide a financial guarantee would force investment into low-yield traditional assets, such as government bonds and bank deposits. This, in turn, would lead to low returns.
In seeking to assist countries to strengthen retirement income adequacy in a defined contribution environment, the OECD Working Party on Private Pensions has identified elements of good design and public policy. In this context, the working party concluded life-cycle investment strategies are well-suited for default options. Such strategies offer long-term investment market exposure and risk diversification throughout the accumulation phase, while reducing the impact of market risk as the beneficiary approaches retirement.