Value for money in unit-linked products ‘not satisfactory’ – EIOPA

The value for money of unit-linked products is “not satisfactory”, according to European Insurance and Occupational Pensions Authority (EIOPA) executive director, Fausto Parente.

Speaking at a panel hosted by Better Finance for European Retirement Week Tuesday, 30 November, Parente focused on the issue of value for money in unit-linked products, which can be used to save for retirement, and what EIOIPA is doing to improve this. This week the regulator has also published a framework for delivering better value for money in a consumer-centric way.

“The issue of value for money is at the core of our initiative and how to enhance trust in the financial sector,” Parente said.

“Unit-linked products that can be used as a personal saving product for the third age are really not satisfactory – there is not enough value for money, why? Because the costs are quite high in many instances and costs can have a strong impact on the return at the end of the saving period.

“The other point that we’re also trying to address is the complexity of certain products. The complexity is in our mandate to try to foster simplicity; it’s hard to convince [the industry] that complexity is an issue. There are benefits in having some products that offer different options and different possibilities for the most experienced investor to make choices, but in some cases complex products are sold to mass retail consumers and this is not helpful for the increase of trust in the financial sector.”

EIOPA believes that products offer value for money when costs and charges are proportionate to the benefit expected – such as investment performance, guarantees or coverages – for the identified target market.

Secondly, Parente said costs and charges need to be reasonable, taking into account the expenses borne by the provider. “We have seen in a number of cases, those two requirements for the costs are not respected,” he said.

A previous thematic review by EIOPA found that commission for certain products were very high, such as 50 per cent of the premium or 70 per cent in some extreme cases, which Parente said is “unacceptably high and contrary for the value for money”.

EIOPA’s framework has set out the common principles needed so unit-linked products can offer value for money. These cover pricing, complexity, testing, reviews and supervision. Overall EIOPA expects a risk-based approach – where the products which pose the greatest risk of consumer detriment due to poor value for money are given supervisory priority. Poor value for money can undermine the development of the single market, reduces the impact of capital markets union, and lowers household resilience to financial shocks over the longer term.

EIOPA and the national competent authorities will monitor the market to assess how well insurance product manufacturers ensure that customers receive fair value unit-linked products. Towards this goal, EIOPA is carrying out further work to develop a methodology to ensure a consistent assessment of value for money across the European Union and it will continue reporting on this aspect.

The full statement can be viewed here.

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