European Private Pension Product: An Alternative to Third-Level Pensions?

For more than 20 years, a national pension system has been operating in Latvia, which includes state 1st and 2nd level pension plans and private voluntary 3rd level pension plan. At the end of last year, an innovation appeared – “European private pension product” or European pension. Let’s introduce this product to the readers so they can judge whether it is an alternative to the 3rd level of pensions.

The European pension is created, offered and protected in accordance with uniform European standards – EU Regulation no. 2019/1238. It is created as a safe and investor-friendly investment product that should be available in all EU countries. The Regulation sets requirements for investor protection. For example, information to the investor should be provided in a standardized way that will allow people to make an informed choice in favor of one or another European pension product in a simple and comprehensible way. Also, the service provider must prepare a preliminary calculation for the investor on the amount of the future pension in the event of negative or positive scenarios. Before concluding the contract, the potential client has the right to an individual consultation. The regulation also sets out the procedure for handling complaints, which is an important issue for investors in disputes with a cross-border element.

Requirements have been set for the protection and preservation of the client’s money. The regulation requires that when investing pension plan funds, the manager must follow a conservative investment strategy and mitigate risks over time. ESG factors should be considered when making investments. The money invested by customers is kept in a custodian bank.

Licensed financial institutions (banks, insurance companies, pension funds, brokerage companies, alternative investment funds and investment management companies) are entitled to offer the European pension after the relevant pension plan has been registered by the financial supervisor. Likewise, financial institutions from other EU countries may also offer the European pension if they have completed a certain notification procedure in their country. To help people find the European pension product they are interested in, the website of the European Insurance and Pensions Authority has centralized registrywhere you can familiarize yourself with all available European pension plans in a transparent way and easily compare them.

Unlike a “national” pension, the European pension can be transferred from one EU country to another in a simple and convenient way. The regulation introduces the procedure for the transfer of accumulated funds from one service provider to another.

During the “accumulation phase” of the pension, such transfers are free and are allowed at least once every five years. This advantage will certainly be appreciated by residents who change their place of residence, move to live or work in another European Union country. When changing the country of permanent residence, the client has the choice of staying with the same service provider, transferring the pension to a new country if the service provider operates in such a country, changing the service provider or not changing anything and continuing to contribute to his current pension plan.

When making contributions to a pension plan, the issue of taxation is essential. Thus, the law “On personal income tax”, for example, provides for tax relief for contributions to pension level 3. The investor, a tax resident of Latvia, has the opportunity to reduce his taxable income for contributions to pension level 3, the amount of which does not exceed 10% of the investor’s annual gross income and is not greater than 4,000 euros per year, and to receive a refund of personal income tax in the amount of 20%.

If a person changes his tax residence (moves to live and earns income in another EU country), the question of tax benefits for contributions to level 3 of Latvian pensions (if such are continued) or for similar contributions to private pension funds of EU countries will be considered according to the law of the country where a person has a tax residence.

Unfortunately, the issue of tax credits for European pension contributions has not yet been resolved. It is not clear whether it is possible to receive similar tax benefits for contributions made by a resident of Latvia to a European pension product. Amendments to the law “On personal income tax” are only in the development stage at the Ministry of Finance.

Unfortunately, the entry of the European pension product into the EU market is very slow. Currently, no European pension product is available in Latvia. Also, according to the information at our disposal, none of the financial institutions operating in Latvia have applied for the registration of their European pension products at the Bank of Latvia. The registration of the European pension product in other European countries is proceeding just as slowly. So far, 6 pension products have been applied for with the right to distribute them in the Czech Republic, Croatia and Slovakia.

In summary, it can be concluded that the European pension is a European-wide investment product, which could eventually become an alternative pension to level 3 for those people who move within European borders, earning money and building their career in another EU country. It is definitely worth following the development of this product and considering investing if it fits your future plans.

The authors are Anna Mišneva, sworn attorney, Madlena Drozdova, tax consultant, ZAB Ellex Klavins