Case study: HypoVereinsbank (HVB)
Self-invested personal pensions (Sipps) have been riding on a wave of popularity and now the group Sipp is muscling in on the act making its own headlines and attracting employers’ attention.
The increased investment flexibility and more lenient pension contribution limits afforded by pensions simplification legislation have helped to raise the profile of the Sipp market. Employers are now starting to eye up group Sipps as a way to attract and retain senior executives by providing a pension scheme that offers greater investment choice and control.
Some providers are going so far as to tout the group Sipp as an up-and-coming rival to the group personal pension (GPP). Whatever the case, however, it is increasingly being seen as a potential alternative to traditional occupational pension schemes such as money purchase plans.
But amid the hype and excitement are serious issues for employers to consider.
Put simply, a group Sipp is effectively a collection of individual Sipps gathered together with one provider, which has a similar legal status to GPPs. That is, the group part is an administrative umbrella while the legal entity is made up of the individual Sipp contracts that sit within it.
Group Sipps, therefore, function like an individual plan in that members have a wider array of investment options open to them than in other occupational pension schemes.
It also receives the same tax treatment as any other pension, so contributions benefit from tax relief at the highest tax rate paid and staff can take up to 25% tax-free cash.
Where the group Sipp differs from individual products is in its ability to benefit from economies of scale, providing simpler admin and cheaper fees.
Tom McPhail, pensions research manager at IFA firm Hargreaves Lansdown, says: "We’ve now moved to a point where the pricing of a group Sipp is in many ways broadly similar to a GPP or a group stakeholder."
Although it is still early days for the group Sipp, he believes that, over time, it will become more mainstream and less exclusive.
While membership can be restricted to top-rung staff that employers are particularly keen to recruit and retain, some plans offer a much wider appeal, allowing a group Sipp to operate more like a GPP. The difference between these plans and other group Sipp products is that members can turn on the self-investment element as and when they wish.
As a result, the same scheme can cater for the needs of a variety of staff, from those keen to make as few investment decisions as possible, through to those who want a much greater degree of control.
Abigail Morrison, pensions marketing manager at Standard Life, believes group Sipps will come to rival GPPs. "Why would it not become more mainstream? We know more people are taking out Sipps and wanting more control over their own investments, so more employees are going to want to take advantage of self-investment functionality in the future. "[As for] the additional costs that you pay for self-investment, you only pay when you switch the self-investment on so, from that perspective, group Sipps provide the benefit of being able to switch on the Sipp but without any downsides," she says.
A Datamonitor report Group pensions – what is the future? published last February describes group Sipps as the future for the group pensions market with its sales set to be one of the key drivers for market growth.
Hyman Wolanski, head of pensions at Alliance Trust Savings, says it is important there is a restricted investment choice on offer for employees who do not want the full range of investment options. "It’s a bit like whether you want a Mini or an Aston Martin. A lot of people will love the Aston Martin. But if you’re just a cautious little driver you might just be frightened to death by it."
Group Sipps also have other advantages, for example, in the way they can be used alongside other benefits. Michelle Cracknell, business development director at IFA firm Origen, explains such plans can be a useful home for company shares obtained through the likes of sharesave schemes.
Employees who are keen to hold onto their shares can put them into a group Sipp, which will effectively enable them to benefit from double tax relief. "It helps the employer’s administration, rather than having lots of employees talking to them about lots of different Sipps which staff have all set up individually," says Cracknell.
But not everyone is completely sold on the merits of using a group Sipp instead of a GPP. Scottish Life has been considering developing its own group Sipp product, but still has reservations. Mark Polson, head of corporate business, argues that the base cost for a group Sipp which is being used like a GPP can be higher than a GPP itself in schemes such as those marketed by Standard Life and Aegon Scottish Equitable. But he adds this is reasonable considering these can be more sophisticated plans.
Aegon Scottish Equitable and Standard Life, however, argue that, while each scheme is priced individually based on factors such as size and contribution levels, group Sipps acting as GPPs typically cost around the same as a standard GPP product.
Polson also points to the risk element of a group Sipp for employers, warning that an employee could decide to go into an obscure high-risk fund three months before retiring and end up losing everything. In these cases, there is a risk employees could come back to their employer, complaining that advice was not provided and wanting compensation.
Staff should also receive advice alongside the product. "Employers need to be satisfied that employees aren’t going to do something daft and hold it against them," says Wolanski.
But Malcolm Gordon, business development director at A J Bell, believes that a group Sipp is not necessarily a straightforward alternative to a GPP. Employers need to think carefully about who actually controls the investment, whether it is the individual or an adviser on their behalf and exactly how that will work. "I think it’s important to look at the investment control and who’s going to be responsible for that and how appropriate that is under the circumstances," he says. Another area of debate concerns the portability of group Sipps. While Wolanski believes they are fully portable, Polsen has some concerns. Employers, for instance, will also have to consider an exit strategy for staff. So while it could prove a worthwhile benefit, employers need to ensure they look through the hype and weigh up both the benefits and the risks in their decision making.
Main players in the group Sipp market
Traditionally, group Sipps have been used by professionals to buy commercial property such as their business premises. More recently, however, they have started to be viewed as an alternative to the likes of money purchase schemes and group personal pensions.
Initially, only independent firms offered group Sipps, but since their appeal has widened, life offices have entered the market. Standard Life and Aegon Scottish Equitable are among the main providers.
A number of independent organisations also provide group Sipps, Some currently specialise in more traditional uses, while others have also moved into offering schemes with wider employee appeal. These include: Alliance Trust Savings, Hargreaves Lansdown, Hornbuckle Mitchell Trustees, Pointon York, A J Bell and Origen.
Case study: HypoVereinsbank (HVB)
European bank HypoVereinsbank (HVB) has launched a group self-invested personal pension (Sipp) for its senior executives based in London.It previously offered a trust-based occupational scheme, however, wanted to provide upper-tier staff with a more sophisticated type of pension. As a result, it now offers the group Sipp alongside a new group personal pension plan (GPP).
Jason Lines, corporate pensions and employee benefits director of Hoyland Financial Management, which set up and services both schemes, says: "HVB has a number of very high-earning senior executives who really needed a more sophisticated pension structure than what was previously offered. The group Sipp gives them more investment freedom. They’re people who get large bonuses and therefore have large pension assets to invest."
The 37 employees who are eligible to join the group Sipp can opt to contribute solely to that scheme, only to the GPP or to both pension schemes. The group Sipp is provided by Wolanski & Co, now part of Alliance Trust Savings.