Group self-invested personal pensions are gaining popularity in the workplace because they have something extra to offer, says Matthew Craig
Self-invested personal pensions (Sipps) have sometimes been seen as expensive, bespoke plans for affluent individuals, but they are now entering the workplace in the form of group Sipps.
Last year, BT and HSBC set up group Sipps and other employers are expected to follow suit. Paul Sturgess, director of defined contribution (DC) policy and product development at Capita Hartshead, says: “I am getting feedback that on [requests for proposals] issued for employer-sponsored schemes, group Sipps are featuring highly.”
To explain why this is so, it is necessary to see how a group Sipp fits into the contract-based DC pensions landscape. At present, many private sector employers have adopted group personal pensions (GPPs) or group stakeholder plans as a low-cost, low-administration option. This has particularly been the case where employers have reacted against the cost uncertainty and administrative burden of final salary schemes.
In practice, there is likely to be little difference between a GPP and group stakeholder scheme. Stakeholder pensions have a single annual management charge (AMC) capped at 1.5% a year for the first 10 years and 1% thereafter, but a GPP’s AMC may be lower than this if the employer is attractive to a GPP provider because of factors such as number of members, size of pension contributions and employee turnover levels. A GPP may also offer a wider investment choice than a stakeholder plan, but in many cases, employers using either will be happy with a low-cost, passive default fund together with a limited range of core funds for members who want to make their own investment choices.
This type of DC pension will continue to be offered in the future, especially as employers will soon be compelled to auto-enrol staff into a qualifying pension under the reforms due to be introduced from 2012. However, a group Sipp can include the low-cost investment options of a GPP or stakeholder scheme, while offering additional features to members who want them. These extra features include the ability to hold shares rolled over from a sharesave plan or long-term incentive plan, which is seen as a highly-efficient combination of tax breaks. A facility for staff to trade stocks and shares can sit alongside that and group Sipps can also enable employees to access a wide range of pooled funds and other investments, such as commercial property.
One key feature of group Sipps is that staff should pay for these extras only if they use them. Andrew Dickson, senior business development manager at Standard Life, says: “This is a very important point. There is no cross-subsidy and charges are completely transparent. Members using the default fund or simple insured funds only pay the AMC on those funds. Senior staff may invest in stocks and shares and they pay the associated dealing costs as they go.”
Sturgess says the fact members pay for the extra features of a group Sipp only if they use them is vital. “Auto-enrolment [due in 2012] will amplify the need for this,” he adds. “Employers will not want to autoenrol staff into an expensive plan.”
In the future, Sturgess predicts there will be three layers of charges at group Sipps: a low-cost GPP-type charging structure, then sharesave rollover charges, and finally additional charges for those investing more widely. “[Organisations] will want one scheme to cover all of this as they will not want to do it twice with different plans,” he says. “They will want a vehicle sophisticated enough to cope with everything, from the finance director’s pension needs to those of junior members of staff. It is not easy, but it can be done.”
And group Sipps have another ace up their sleeve, says Dickson. “The DC market is relatively immature, but in five to 10 years we will see significant numbers of people taking benefits out,” he says. “A group Sipp can support a wider range of decumulation options than a GPP or stakeholder.”
With more members expected to look at flexible retirement in the future, for instance using income drawdown instead of annuity purchase, this is another potential driver for group Sipp take-up.
More articles on: Special report 2010: Contract-based pension investment