Buyer’s guide to group personal pensions

gPPs have become the workplace pension of choice for many employers, says Tom Washington

With employers’ continuing migration from defined benefit (DB) to defined contribution (DC) schemes, group personal pensions (GPPs) have become the workplace pension of choice for many organisations. From a new business point of view, the GPP market appears relatively buoyant. Figures from the Association of British Insurers (ABI) show there was a 15% increase in new contracts between the fourth quarter of 2007 and the first quarter of 2008, and a 25% increase from then to the second quarter of 2008.

But this doesn’t necessarily mean that the overall size of the market has grown, as rewriting schemes from one provider to another is often recorded as new business. According to Iain Oliver, head of corporate pensions at Norwich Union, this competition has led to a drive for quality among providers. “Those who aren’t committed to the corporate market have seen their books gradually dwindling. This has been happening for a number of years,” he explains.

There are still opportunities for growth, particularly in terms of the number of employees who belong to GPP plans. “We see a lot of opportunities in recruiting employees onto existing schemes, although that will be countered by the downturn in economy,” says Oliver.

Whatever the economic situation, employers will have to face the consequences of increased take-up when auto-enrolment comes into effect under the government’s planned pensions reforms in 2012. For a while earlier this year, the viability of GPPs hung in the balance as auto-enrolment into them was feared to be in breach of the European Distance Marketing Directive and Unfair Commercial Practices Directive. But in May, the Department for Work and Pensions announced that the European Commission had confirmed auto-enrolment into contract-based pension schemes, such as GPPs, is consistent with European law.

Investment options
If employers wish to continue to offer GPP schemes instead of moving staff over to the system of personal accounts they must meet set criteria, including a minimum 3% employer contribution. However, as auto-enrolment will raise pension costs in most cases, some employers may be encouraged to move away from GPPs.

Nigel Aston, senior business development manager at Standard Life, explains: “Some [employers] see personal accounts as the last straw and may take the line of least resistance, with finance directors looking to minimise cost. Other employers, perhaps in more knowledge-based areas where human capital advantage is key, may seek to differentiate themselves from their competitors by continuing to offer an attractive benefits package.”

One potential advantage of GPPs over personal accounts is that they are likely to offer a greater range of investment choices. Simon Pardoe, propositions director at Legal & General, says the market has already seen an increase in employer demand for a range of funds to give scheme members autonomy over their investments. “Employers want to know the right funds are in place for their employees. There are also signs people are becoming more interested in where their money is invested, although vanilla funds are still the best option for some,” he says.

But Oliver believes offering a wide range of funds could work against market growth. “Having to choose from a huge list is offputting for a lot of [staff], so it is about getting down to a shorter list, and making sure this is related to their attitude to risk and lifestyle position,” he says.

An issue for any organisation offering a GPP for staff is how to discourage scheme members from simply signing up to the plan’s default investment option. One way of helping staff make more appropriate investment choices is to offer a lifestyle fund as default. This invests younger staff primarily in equities and progressively switches them to lower-risk cash and bonds as they begin to approach retirement. Jamie Clark, occupational pensions marketing manager at Scottish Life, says employers are increasingly taking this approach. “Lifestyle funds are based on time and risk. If a pensioner has an investment high in equity content and there is a stock market crash, their pension is halved overnight. The same goes for a young employee who has a default investment in a low-yield fund for a long period of time. Their return could be much higher if invested elsewhere,” he explains.

Technological change
One option for employers looking to provide greater investment choice is to combine a GPP with other pension arrangements. “A trend we’re seeing is the rise of group self-invested personal pensions (Sipps), which can cover the entire workforce, but are only paid for if used.” says Oliver.

Ward adds: “Members can choose to have a Sipp as part of a GPP, which opens up the possibility of investing in funds across the market. There is a demand for the facility, especially from financially-sophisticated staff.”

Technological developments are also prompting change within the market. “It is now expected providers will have [online] services. The application process is expected to be as slick as possible [and] there is a big demand for using the web to sustain [members’] relationships with pensions [in terms of] making changes to it and so on,” says Pardoe.

But Oliver argues online application processes have become too easy, which may lessen employees’ engagement with their pensions. “Providers and employers are still responsible for helping staff make the right choice for them and prevent high levels of defaulting,” he says.

Communication, therefore, remains important. “The bar has been raised for attractive, bespoke approaches to communication so employees will want to look at it rather than filing it away in their drawer,” adds Pardoe. “The market has to cater to specific needs. We have been using creative ideas such as podcasts and CD-Roms.”

Scheme governance is another issue facing GPPs, and one which is high on the Pensions Regulator’s agenda. As the market has moved away from the trust-based governance that applied to DB schemes, it has left a grey area in terms of responsibility. Jeremy Ward, head of pensions marketing at Friends Provident, says scheme members as well as employers need clarity. “Who is responsible for making sure the right fund choice is there and that members are communicated with? There needs to be clarity. Some kind of pseudo-trustee may be put in place to advise members but whatever happens, it must be installed in a formal way,” he says.

Looking to the future, most GPP providers expect further product and systems development in the market after Standard Life acquired flexible benefits provider Vebnet in September. Scottish Life’s Clark says: “We envisage this trend continuing, with providers trying to improve their product with bolt-ons,” he adds.

Focus on facts
What is a group personal pension (GPP) plan?
A group personal pension is a type of contract-based pension scheme organised by the employer. However, employees hold individual personal pensions directly with the pension provider.

What are the origins of GPPs? GPPs were introduced in 1988 when the government replaced retirement annuity plans with personal pensions. In an effort to compete with stakeholder pensions, costs were reduced in 2001 and since then, schemes have extended their investment options to remain competitive.

Where can employers get more information and advice about GPPs? The Society of Pension Consultants (www.spc.uk.com) is the representative body for pension consultants and advisers.

In practice
What are the costs involved?
Schemes are individually priced but a competitive market has driven costs down. Annual management charges range from 0.4% to 0.9%. Consultant or advice costs vary. Some independent financial advisers still take upfront commission from providers, while fee-based consultants tend to charge by the hour, starting at around £75.

What are the legal implications? Employers with at least five eligible employees must offer a pension arrangement. If a GPP is the only scheme they offer, employers must contribute the equivalent of at least 3% of a member’s salary. Employers do not have legal responsibility for the scheme once it is up and running as there are no trustees, and employees hold contracts directly with the pension provider.

What are the tax issues? Both employer and employee contributions are eligible for tax breaks. Employees can pay in up to 100% of their salary each year.

Nuts and bolts
What is the annual spend on GPPs?
Figures on the total size of the GPP industry are not available but information from the Association of British Insurers shows the annual premium equivalent for new business in 2007 was around £1.9 billion.

Which providers have the biggest market share? Again, no figures about market share are available although big players include Standard Life, Aegon Scottish Equitable, Scottish Widows, Legal & General, Friends Provident, Scottish Life and Norwich Union.

Which providers increased their market share most in the past year? A high proportion of business is not truly new but rather switched between providers. Most are reporting healthy growth. For example, Standard Life reports that GPP sales were up 29% in 2007, 27% of which was group self-invested personal pension business.