If you read nothing else, read this…
• Group self-invested personal pension plans (Sipps) are growing in popularity as employers implement schemes to cover an entire workforce.
• Most second-generation group Sipps have a two-tier structure, with a limited fund choice for most staff and
a self-investment option for senior managers and directors.
• Sipp charges have fallen sharply, so staff who do not opt for the greater investment choices are charged no more than if it was a GPP.
• Employees can transfer bonus payments and proceeds from maturing employee share schemes into their Sipp.
Case study: GSK boosts Sipp savings options
GlaxoSmithKline (GSK) was one of the first companies to launch a second-generation group Sipp in December 2007. It wanted to boost its employees’ opportunities to save, and at a lower cost than buying a Sipp directly from a provider.
GSK selected Legal and General to provide and administer its Sipp, which was launched to coincide with the vesting of GSK’s restricted share awards for managers and executives. It was then rolled out to all GSK staff the following month. Each year, all employees have the option to transfer their bonus and maturing sharesave
proceeds to the Sipp.
Harsha Modha, director, UK benefits at GSK, says: “By introducing the GSK Sipp, we have been able to offer employees an attractive, tax-efficient way to take advantage of opportunities to build up their pension funds from
their other savings with the company.”
Group self-invested personal pension schemes are no longer just the preserve of senior management, says Ceri Jones
The big attraction of self-invested personal pension plans (Sipps) over other types of contract-based defined contribution (DC) plans is they can invest in a broader range of assets, including shares and commercial property. Historically, this made Sipps largely the preserve of equity partners in small firms looking to club together to buy their business premises. In recent years, however, Sipps have been implemented in FTSE 100 companies, such as BT and GlaxoSmithKline, to cover the entire workforce, and their popularity is growing.
Most second-generation workplace Sipps have a two-tier structure, with a limited fund choice for most staff and a self-investment option for senior managers and directors. Ann Flynn, head of customer management at Standard Life, says: “In most cases, the true self-invested service is targeted at the senior layer of the workforce. Perhaps 90% of schemes are arranged on a segmented basis.”
Such structures have become possible because Sipp charges have fallen sharply, so members who do not use the greater investment freedoms are charged no more than if it was a group personal pension (GPP). “The basic Sipp offering is very similar to a GPP and priced on the same basis,” says Flynn. “It is only when the member moves into selfinvesting that there is any additional cost.”
The pricing of pension contracts is based on characteristics such as staff numbers, turnover and average contribution levels. For some employers, a group Sipp may be as cheap as any DC alternative, starting from 0.3-0.5% a year on funds under management.
But some Sipps are charged on a fixed fee, usually where members are allowed to invest in non-collective assets, such as equities. This is tough on those making smaller contributions, because an annual fee of £100-£200 could equal a month’s contributions.
For the employer, the appearance of giving staff greater investment freedom causes little extra administration. Lisa Webster, senior technical consultant at Hornbuckle Mitchell, says: “Sipps might give more fund choice than a typical personal pension, but they will usually still be based on funds on a platform and be restricted in terms of the investment universe. Linking them together can make iteasier to administer.”
Roger Breeden, principal at Mercer, adds: “The number of truly self-invested people choosing assets outside of collective investments is very low. Many high-earners still invest with the default fund. Some will do their own thing, but the majority will still be directed because although they may be wealthy, they are time-poor.”
Fully flexible option
So employers need to consider how many people a Sipp really suits. Richard Mattison, business development director at James Hay Partnership, says: “A Sipp is meant to be a fully flexible pension, but how many people have sufficient savings and will make use of the investment flexibility? Not many.”
One popular use of workplace Sipps is to roll over the proceeds of an employer’s share incentive plan tax efficiently. This is a facility employers frequently ask about, says Carole Avis, finance and product director of Legal and General’s Workplace Savings business.
The restriction on pension tax breaks for high earners has dampened appetite for schemes with a rationale of property investment, but it is still possible to put £50,000 a year into a property and stagger a transaction over several years. The tax change has also prompted employers to ask about running other savings vehicles, such as corporate individual savings accounts (Isas), alongside pensions.
John Foster, a consultant at Aon Hewitt, says: “There was greater interest in workplace Isas a while ago, but some employers have parked their plans to extend their pension spectrum while they hammer out their solution to auto-enrolment. Sipps are increasingly part of employers’ flex structures, but not all arrangements will include Sipps.”
He adds Sipps will be more popular as retirement patterns become more flexible and more people opt for drawdown.
Two big regulatory developments also favour Sipps over other money purchase pension arrangements. Under the Retail Distribution Review (RDR), commission on new sales of pensions will be banned from 31 December 2012, removing the bias towards GPPs as advisers will need to agree a set fee for their services. “The RDR will favour Sipps over GPPs because it levels the playing field,” says Mattison. “Financial advisers are still busy selling GPPs on a buy-now-while-stockslast mentality because they can still earn substantial commission on them.”
The other big regime change is the 2012 pension reforms, for which insurance companies are confident Sipps will be considered suitable as qualifying schemes. They may even carry lower charges than the government’s national employment savings trust (Nest) in the early years.
When self-investment is anything but
Another impact of the Retail Distribution Review is growing adviser demand for third-party investment services, usually risk-graded model portfolios on a platform. These have long been available for IFAs working with high net-worth clients, but the new portfolio services are for advisers serving the mass market, including members of Sipp schemes who may suddenly have a freedom they do not know what to do with.
Most IFAs are outsourcing these requirements to avoid compliance risk, but some topend advisers offer portfolio
services themselves, matching the individual Sipp member’s risk profile to an investment portfolio and then switching the asset allocation in line with economic conditions.
For example, one of James Hay Partnership’s clients, a West Midlands engineering firm, has 145 staff – five directors who are members of its small self-administered scheme (SSAS), 40 managers and 100 other staff.
The directors wanted to add significance to promotion to the management tier by establishing a corporate Sipp
for the 40 managers where the fund is managed by a discretionary fund manager offering a choice of three funds to match three attitude-to-risk profiles: low, medium and high.
Read more on self-invested personal pension schemes