The European Fund and Asset Management Association (EFAMA) has called for the “restrictive” 5 per cent cap on private asset allocations in the Pan-European Personal Pension Product (PEPP) to be lifted.

In its position paper on the European Commission’s (EC) Supplementary Pension Package, the association said that, instead, the framework should allow investors, either individually or collectively, to select risk profiles that can include higher exposure to unlisted or illiquid assets.

Currently, the EC has not proposed to increase the 5 per cent cap as part of its overhaul of the PEPP.

EFAMA was broadly supportive of the EC’S plans for the PEPP, seeing it as a “decisive step toward closing Europe’s growing pensions gap”. However, its point on private asset allocation was one of a number of recommendations it suggested to make the PEPP a success.

For example, it supported removing the 1 per cent fee cap for the Basic PEPP, noting that it will be “essential” for its success, but raised concerns about the proposed Value for Money (VFM) framework.

EFAMA argued that current proposals for VFM “cannot meaningfully capture the long-term performance of pension products”.

The association also supported the removal of the mandatory advice requirement but said that if citizens want advice, they should be able to choose from both independent and non-independent advisers, as the former are still very limited in many countries.

It also welcomed the proposed addition of lifecycle investment strategies as the default option for the Basic PEPP, as evidence shows that age-appropriate investments with long-term growth potential deliver “much better outcomes compared to low-risk, low-return capital guarantees”.

However, it said providers should retain flexibility in designing these strategies.

The PEPP, which has been available to providers since 2022, has seen a lacklustre response from the industry, with just two PEPP providers on the market.

EFAMA believes that the EC’s proposals will “depend heavily” on effective implementation at the national level. It also said the measures should be combined with national measures, such as auto-enrolment in occupational pensions, supportive tax incentives, and pension tracking systems, to boost participation and make investing more inclusive.

On the IORP II Directive, EFAMA said any changes should encourage long-term investment but should not disrupt existing well-functioning national pension systems.

Specifically, it said that the Prudent Person Principle must be maintained to ensure IORPs can prudently invest across a broad range of asset classes, including equities and illiquid assets.

It also called for a principles-based approach to cost transparency, as “allocating costs to individuals in collective pension schemes is often impractical and risks creating misleading signals”.

In addition, it said the proportionate application of depositary requirements is necessary. On this, EFAMA said existing national custody, audit and supervisory frameworks must be recognised, to avoid creating additional administrative costs without clear prudential benefits.

Commenting, EFAMA regulatory policy adviser, Kimon Argyropoulos, said: “It is essential that we get supplementary pensions to work better throughout Europe to alleviate pressure on state-sponsored pension systems.

“By boosting participation in workplace and private pensions, we can strengthen retirement outcomes while also channelling long-term savings into the wider economy. The commission has delivered, but it now needs member state support. A flexible PEPP and a principles-based IORP framework are critical to making this a reality.”

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