Focus on facts
What is a GPP?
A group personal pension is a contract-based pension scheme that is arranged by the employer, but each member holds a personal pension contract directly with the provider.
What are the origins of GPPs?
GPPs came in on the back of individual personal pensions, which were introduced in 1988 to replace retirement annuity contracts.
Where can employers get more information and advice on GPPs?
The Society of Pension Consultants is the representative body for pension consultants and advisers. Visit its website or telephone 020 7353 1688.
Nuts and bolts
What are the costs involved?
Annual management charges are typically between 0.5% and 1%, but can be lower, say 0.3%, where advice is given on a fee basis.
What are the legal implications?
Employers with at least five eligible employees must offer a pension arrangement. If the GPP is the only scheme offered, employers must make a contribution equivalent to at least 3% of an employee’s salary. Employers do not have legal responsibility once the scheme is up and running because there are no trustees, and employees hold contracts directly with the pension provider.
What are the tax issues?
All personal contributions are eligible for tax relief, while employer contributions are free from tax and national insurance. Staff can pay in up to 100% of salary each year, but tax breaks are only on up to £50,000 a year.
What is the annual spend on GPPs?
This figure is not available, but the Association of British Insurers (ABI) shows new business GPP sales were worth £5.3 billion, for annual and single premiums, in 2010. According to the Office for National Statistics, there was £299 billion in insurance-administered pension funds, including individual personal pensions and GPPs, in 2009, in the accumulation phase only.
Which GPP providers have the biggest market share?
No published data is available, but anecdotally, the key players include Aviva, Aegon, Friends Life, Legal and General, Prudential, Scottish Life, Scottish Widows and Standard Life. One that is tipped to watch is HSBC Workplace Retirement Services, which is a marginal player, but with massive potential because of the size of its business.
Which GPP providers increased their share the most over the past year?
Again there is no data, but one commentator has tipped Legal and General.
A number of factors, including the 2012 pension reforms and the struggling economy, are making this a time of change for group personal pension schemes, says Peta Hodge
The group personal pension (GPP) market is undergoing significant changes, largely as a result of fiscal and legislative developments, the current tough economic conditions, technological advances and the continued migration from defined (DB) to defined contribution (DC) schemes.
Martin Palmer, head of corporate benefits marketing at Friends Life, says: “This is undoubtedly one of the biggest periods of change the pensions market has witnessed.”
After a couple of years in which the market seemed to stall, figures from the Association of British Insurers (ABI) show there was an upsurge of interest in GPPs last year, with new business sales worth £5.3 billion in 2010, compared with £4.1 billion in 2009 and £4.3 billion in 2008. This is perhaps a little surprising, not least because existing GPP members have been having rather a torrid time, says Peter Glancy, head of corporate pensions propositions at Scottish Widows.
“Market conditions mean plan values will be less today than 12 months ago,” he says. “There is also likely to be a lot of negative sentiment in the media around financial markets and this, combined with squeezed pay packets, will make it a much easier decision to opt out of an employer’s scheme.”
The boost in GPP sales figures could be due to employers starting to prepare for the 2012 pension reforms, which include the requirement to auto-enrol staff into a qualifying workplace pension with minimum contributions from the member and the employer.
Softening the financial strain
Glancy adds: “Even smaller but proactive employers are starting to prepare for auto-enrolment, often softening the financial strain by starting to phase contributions in gradually.”
Jamie Jenkins, head of corporate strategy and propositions at Standard Life, says the impact of auto-enrolment alone is potentially massive. “There could be as many as seven million additional pension savers, and around one million additional employers offering a pension scheme,” he says.
Jamie Clark, occupational pensions marketing manager at Scottish Life, is also seeing more schemes being set up with auto-enrolment in mind. “One popular way in which employers are offsetting the cost of pensions is salary [sacrifice] and we have seen growing interest in this,” he explains.
Some growth in GPP business may also result from the retail distribution review (RDR), which from January 2013, will end the remuneration of advisers and consultants by commission paid by pension providers. This may mean they set their own charges for their services. Philip Audaer, senior consultant at Aon Hewitt, says this has led to a ‘short-term feeding frenzy’.
Audaer says many schemes in the intermediated independent financial adviser (IFA) market are being rewritten, grabbing commission while it is still available.
Another significant factor in new business growth is the continued flow away from DB pensions to DC schemes, such as GPPs, among larger organisations. Bigger employers not only bring a greater number of members, they also tend to contribute more on each member’s behalf. The Office for National Statistics’ Pension trends report, published in September 2011, shows that a higher proportion of GPP members working for larger employers, with 100 or more employees, received employer contributions of 6% or more in 2010 45% of this group did, compared with 34% working for organisations with fewer than 100 staff.
Robin Hames, head of technical at Bluefin Wealth Management, says the entry of medium and larger employers into the GPP market has increased competition, bringing cost margins down. Lower cost margins have led to consolidation, and there are now fewer GPP providers than there were 10 years ago.
The involvement of larger employers has also encouraged innovation, particularly in terms of developing online platforms and improving employee engagement, says Hames.
Communicating and promoting
Communicating and promoting GPPs to the workforce has become increasingly important. Many GPPs are branded and sold as the employer’s own and it is less acceptable for the plans to look like an off-the-shelf product from an insurance company.
This type of customisation will ensure GPPs still have a place in the market after the 2012 pension reforms come in, which will include the introduction of the government’s new pension scheme, the national employment savings trust (Nest), says Hames.
Hames believes the introduction of Nest is good news for micro-employers and certain groups within larger employers’ workforces, but if an employer wants to build a pension plan to improve employee engagement, it is more likely to opt for a GPP.
But Laith Khalaf, pensions investment manager at Hargreaves Lansdown, takes a different view of what he describes as the biggest ever shake-up in workplace pensions. He says Nest and corporate wraps, platforms giving staff access to a range of financial benefits and investment options, such as pensions, share plans and corporate individual savings accounts (Isas), are likely to gradually muscle out GPPs. “Nest is cheaper and corporate wraps have more attractive options,” he explains. “The result is that the middle ground inhabited by GPPs is likely to get squeezed.”
Although we will have to wait to see how the market pans out, much could depend on how individual providers position themselves. Glancy says: “GPP providers will need to determine the extent they want to sit alongside Nest as a broader, value-added alternative for the upper echelons of a workforce, or to compete directly with Nest for the whole workforce.”
Existing GPP technology
Similarly, Hames suggests that the extent to which providers develop existing GPP products or embrace corporate wraps will depend largely on how good their existing GPP technology is. “Some still have five or six legacy platforms, which still have live schemes and offer a pretty substandard proposition, with schemes paying over the odds and not getting the standard of service they could get,” he says.
“A lot of them that were perhaps a little late in developing the technology for the pensions market have almost bypassed it and jumped straight into corporate wraps.”
However the market develops, Friends Life’s Palmer says there will be an increasing emphasis on using technology to engage and communicate with members. “The industry needs to embrace new technologies and meet the demands of a technologically advanced workforce, including the iPad generation, if engagement, and therefore increased savings, are to become a reality,” he says.
Carole Avis, product and finance director, workplace savings at Legal and General, concludes: “The market will remain very competitive and be dominated by auto-enrolment requirements. Engaging employees in this process and offering robust administration and investment solutions will be crucial.”
Read more buyer’s guides