Why the pan-european pension plan (PEPP) failed

Hint: it's not because it was too cheap.

As part of its creation of pan-european capital pools, the EU commission created the pan-european pension plan (PEPP) regulation as a 28th regime.

The PEPP featured a capital guarantee, a maximum cost and the flexibility to invest into ETFs.

In fact, I got so excited when learning about it that I started my second fintech company Horizon65 with the explicit goal to create a pan-european pension plan.

I managed to partner with an IORP fund in Luxembourg and then I learned that the costs of compliance were so high that you need to have at least 3 million euro in assets to make the economics work.

Undeterred, I resolved to first build up a large distribution channel for existing private pensions and then to develop my own private pension plan as a product.

However, to my horror though the first time I intended to partner with an insurance firm to create such a plan it turned out that the regulation was critically flawed and could not be implemented.

Specifically, it required a PEPP needs to have an investment strategy where the paid-in capital must be returned ADJUSTED FOR INFLATION.

When I asked an actuary to look into this (in total two actuaries have looked into it of large German insurance firms on my behalf) they said that BaFin would never approve it because there is always hyperinflation.

No pension plan can be designed that can survive hyperinflation.

A simple fix for the PEPP would have been to reference the target inflation instead of the real inflation.

To my surprise though, one Slovak company managed to get the regulator to approve a PEPP plan and they also added a small tax incentive so it was clear the regulator was overruled by politicians.

I am writing this because the market believes that it was the low-cost factor that killed the PEPP but that’s not true. There are plenty of pension plans on the market that meet the low-cost criteria of the PEPP.

In fact, Horizon65 still brokers those plans if you are based in Germany.
You can get a quote here if you’d like: Pension insurance in Germany