Introducing the European Pension (PEPP)
Finax has achieved a significant victory of European scope. We became the first-ever entity in Europe to be authorized to provide a pan-European personal pension product, making Slovaks the first EU citizens to be able to open this new voluntary pension product.
I am very pleased to publicly announce that Finax, as a securities broker-dealer, is the first entity in Europe to be authorized by the National Bank of Slovakia to provide a pan-European personal pension product and Slovaks will thus be the first EU citizens to be offered this voluntary pension savings option.
This is the first instance of a Slovak financial institution being the first to introduce a new financial product in the history of Slovakia's membership in the European Union.
That’s why I would like to highlight that even a relatively small Slovak entity such as Finax can, thanks to its innovative nature, outstrip all the European financial giants.
Note: Information on legislation and tax incentives specified in this article applies primarily to Slovakia. For information on the legislative treatment of the European pension in other CEE countries, please refer to the localized versions of this blog in other language subpages.
What is PEPP?
PEPP stands for Pan-European Personal Pension Product and is based on the European Parliament's Regulation 2019/1238, which came into force in March 2022.
- a voluntary pension savings scheme,
- designated for all residents of the European Union,
- creates a single market for voluntary savings across the EU, similar to the way 401(k) plans work in the United States,
- can be provided by a wide range of financial institutions - banks, insurance companies, licensed securities dealers, portfolio management companies, asset management companies, alternative investment companies, and occupational pension companies (beware, not to be confused with supplementary pension saving – DDS in Slovak),
- this scheme should encourage EU residents to invest, thereby improving the flow of capital to firms, opportunities for innovation, and indirectly supporting employment in the EU.
The Main Advantages of PEPP
I would define the following to be the five key benefits:
1) Transferability. Savers will have one voluntary pension savings account portable to another country when changing residence, being allowed to either continue saving with the same provider or switch to another provider within the EU in such an instance.
2) The maximum amount of total fees paid is set at 1% of the amount of savings managed.
3) Full product transparency and uniform rules per product regardless of the type of company providing the product.
4) Legislative certainty at the European Union level. Changes will apply uniformly across Europe, and the product will avoid national localisations and political influences. For multinational companies, the PEPP thus guarantees a uniform pension policy for their employees in different EU countries.
5) The European Union strongly encourages Member States to support PEPP with the same tax-levy rules that apply to local voluntary pension schemes, which in Slovakia is the 3rd pillar (supplementary pension saving).
Why Did We Decide to Offer the European Pension Plan (PEPP)?
Finax operates in five countries in Central Europe, and we feel that the existing voluntary pension saving schemes fall significantly short of the global standard. The products themselves, compared to Western schemes, do not achieve interesting appreciation, have high fees, are not transparent, lag in terms of the payout phase, have poorly set investment rules, and do not provide modern solutions.
We want to be the opposite. To provide a simple, modern, cheap, transparent solution built on index funds.
We believe this approach will give savers better service and a significantly higher pension than current schemes.
For us, PEPP is an opportunity to kick-start further growth of our company not only in Slovakia but especially abroad. While today we are evenly matched with the largest asset management companies in terms of net deposits, we seek to become the market leader in Slovakia in this indicator as well.
Who Is the European Pension (PEPP) for?
We will offer PEPP to everyone seeking to avoid relying only on the state pension in old age, supplementing it with voluntary savings. In general, however, we want to offer PEPP to the following four key segments:
- Multinational companies can utilize PEPP to provide all their European employees with a single pension benefit under the same terms and conditions in all the countries in which they operate.
- Slovak companies that employ foreign citizens working in Slovakia for a limited time.
- Companies that are dissatisfied with the current voluntary pension saving scheme in Slovakia. Finax wants to offer a product that would make employers certain that the employee pension contributions create a higher added value for their employees.
- Young people with high mobility across the European labor market.
Finax is already known in the market for its strong focus on financial education, which will be provided free of charge to all our PEPP savers, who will also get access to Finbot, an app that assists ordinary people in their personal finance management.
PEPP Cannot Be Provided by Anyone
Thanks to the National Bank of Slovakia's Innovation Hub, we could communicate with the regulator well in advance and apply for registration a few days after the law was passed. During the licensing process, our model was subjected to very strict tests that the PEPP regulation requires. Our product passed simulations of more than 15 million scenarios.
From my point of view, the PEPP regulation, unlike Pillar 2 and Pillar 3, is based on complex mathematical and statistical modeling, where Finax, as a PEPP provider, has to demonstrate with a high probability that savers' contributions will outperform the evolution of expected inflation.
Finax will be under the permanent supervision of the National Bank and the European Insurance and Occupational Pensions Authority (EIOPA) and, when providing this product abroad, its approval will also be considered by the home supervisor.
How Will Savers' Money Be Invested in the European Pension?
Finax will invest savers' contributions in index funds, as it already does in its other products. Portfolio composition during the first years of saving will be virtually identical to the 100% stock portfolio we currently offer.
Registration will be online, later also via the Finax mobile app. Registration is very simple and straightforward, as required by the regulation itself. It takes 10-15 minutes, utilizing facial biometrics software to verify the customer‘s identity, enabling them to register from the comfort of their living room.
Our robo-advisory software will suggest a suitable risk profile to the saver, advise how much a person should invest per month to get the desired amount of pension benefits, invest all deposits automatically, and maintain the correct investment risk.
This way, the saver does not have to worry about anything. However, they can utilize the saved time by gaining financial education thanks to our blogs, videos (which already have over 2 million views on YouTube), podcasts, and webinars, which I consider a crucial part of our product.
Security of the European Pension
To obtain authorization from the National Bank of Slovakia, our portfolios have undergone rigorous stress scenario testing, and we have implemented special risk mitigation techniques in the investment process.
The PEPP regulation requires us to examine various risks, and the European Pension we offer has achieved the best possible safety rating according to the regulation – risk 1 (SRI indicator) – on a 40-year horizon.
Initially, savers will invest their savings in around 7,400 of the largest and most successful companies from around the world, and 10 years before retirement, a portion of the savings will start to move non-linearly into more conservative bonds.
At the same time, our solution eliminates what I view as the biggest shortcoming of Slovak 2nd and 3rd pillars: the investment strategy of the payout phase. While existing pension pillars allocate the entirety of a savers‘ capital into conservative payout funds before retirement, Finax keeps three-fifths of savers‘ assets in stocks throughout the payout phase, thus ensuring a more significant wealth growth during the pension payout phase as well.
Taxes and Tax Incentives
Taxes represent a significant difference from standard Intelligent Investing. Returns on a European pension will be subject to a withholding tax, just like in the 3rd pillar. That reduces its attractiveness compared to existing Finax products whose returns become tax-free after a year of stock holding.
Therefore, at this stage, we will be focusing primarily on employers who provide European pension contributions as employee benefits. We seek to help companies to ensure their employees live happy and financially secure lives.
However, savers in the European pension will still get one tax bonus, similar to the 3rd pillar. Contributions of up to 180 euros can be deducted from their tax base.
PEPP Fees Are Very Low
Finax will offer PEPP products significantly cheaper than Intelligent portfolios. Clients will not pay any entry or exit fee for the European Pension. They will pay a single portfolio management fee of 0.6% p.a. + VAT, making a total of 0.72% p.a.
The minimum amount of a one-off deposit or regular monthly contribution is only 10 euros.
Savings are committed until the saver's retirement. The saver can only withdraw the funds at retirement in a payout phase lasting at least 5 years.
Finax offers a very attractive discount to its clients. Any client who convinces their employer to provide the European Pension as a benefit for their employees will earn 500 euros managed free of charge per each employee with a PEPP account. The discount will apply throughout the period of active use of the European Pension by the employer.
If the company contributes to more than 50 employees, we will manage the entirety of the referring client's wealth held in Finax free of charge for the duration of the European Pension benefit with the referred employer.
Comparison of Finax PEPP with 2nd and 3rd Pillars
The products have been tested in the Orange Envelope‘s stochastic simulation model, a project that now produces 3rd pillar pension estimates for the Slovak Social Insurance Agency.
The model uses a block bootstrapping technique and works with more than 100 years of data on the economy’s evolution, which it divides into growth and decline periods, called blocks. The model randomly combines these blocks into new economic development scenarios in which the saver lives, works, invests, saves, and receives a pension. Past performance is no guarantee of future returns.
The conclusions of the analysis assume that, under the current legal set-up, savers should receive a higher pension through the Finax European Pension than they would receive with the same voluntary contribution in the 2nd or 3rd pension pillar.
As the analysis is too complex, we will present only one model example of a typical saver aged 34 who will save for 30 years at a fixed rate of €100 per month until the age of 64, when he/she will retire.
In an average scenario (the 50th percentile means that half of the modeling results turned out better and the other half came out worse), the saver should receive about 40% higher pension with comparable risk (SRI 2) and the same monthly contributions.
I believe you will like this product and convince your employer to contribute towards your European Pension.
For more details on the pan-European personal pension product, please see the Key Investor Information Documents.