Buyer’s guide to group personal pensions 2012

The UK pensions system is undergoing significant change this year, with the roll-out of auto-enrolment beginning in October.

Under the legislation, employers must operate a qualifying pension plan into which they are required to auto-enrol eligible employees. This can include a group personal pension (GPP) plan, as long as it meets the government’s eligibility criteria.

According to the Association of British Insurers (ABI), the number of regular and single premium GPPs increased from 3.3 million in 2009 to 3.75 million in 2010, while data from the ABI and market research company Mintel shows the market value of GPP premiums was £7,620 million in 2011.

A GPP scheme is a collection of individual contract-based defined contribution (DC) pensions that are arranged by the employer, but the employee holds the contract directly with the pension provider. GPP providers include insurers, high-street banks, and investment firms.

About 22% of employee contributions into GPPs are paid for through salary sacrifice arrangements, according to the Department for Work and Pensions (DWP).

The annual amount an employee can pay into a GPP is capped at 100% of taxable earnings or £3,600 of gross pay, whichever is greater. This is capped at the annual pensions allowance, which for 2012/13 is £50,000, including employer and employee contributions, as well as any other contributions paid into an approved pension scheme.

Lump sum
At retirement, an employee can withdraw a tax-free lump sum of up to 25% of their fund’s value. They must use the remaining sum to buy an annuity, which is a type of insurance policy designed to provide an income in retirement.

Contributions into a GPP are typically invested in with-profit and unit-linked funds. With-profit funds invest in equities and gilt-edged securities and offer bonuses that reflect, for example, stock market performance. Unit-linked funds, meanwhile, involve investing in fund units.

GPPs are attractive to employers because providers are responsible for administering the scheme, rather than the burden sitting with the employer. A group-wide scheme can also help to drive down charges, including annual management charges (AMCs), because of the bulk business involved. This makes them an attractive vehicle to offer employees to help save for their retirement.

GPPs are also attractive to employers that have a transient workforce because they enable employees to continue to contribute to a scheme when they move between employers, as well as stop, restart and vary their contributions without being penalised for doing so.

Mintel predicts that the GPP market will grow over the next few years because of an increasing number of employers wanting to outsource the administration of their pension schemes and other benefits following a move away from defined benefit (DB) towards DC pension schemes. The Office for National Statistics’ Pensions trends report in July 2012 showed that employee membership of private sector DB schemes fell from 34% in 1997 to 9% in 2011.

However, according to the DWP’s Employers’ pension provision survey, published in July 2012, just 5% of organisations provided a GPP for their staff in 2011. This proportion has remained unchanged since 2009.

The same survey also found that just 3% of GPPs have 100 or more members.

Employers that have launched GPPs for their workforce include House of Fraser, which closed its DB scheme to future accrual and opened a GPP in July 2012. The retailer made the move after its DB scheme deficit nearly trebled, from £31.7 million at the end of January 2011 to £85 million at the end of January 2012.

The DB scheme was closed to new members in 2002, so only 350 of House of Fraser’s 7,000 employees were expected to be affected by the closure to future accrual.

Other GPP converts include Geopost UK, which is replacing its stakeholder pension with a GPP this year, and new London-based asset management firm H20, which launched a GPP for all employees and organisation partners in June 2012.

Recent developments in the adviser market include Jelf Employee Benefits’ launch of a GPP arrangement, provided by Scottish Widows, as part of its new retirement product, Jelf Money at Work.

Pension contributions
According to the aforementioned DWP survey, 83% of employers offering GPP schemes make employer contributions to them. With the introduction of the pension reforms from 1 October, any employer that wants to use its GPP for auto-enrolment purposes must comply with the new standard requirements for minimum total contributions.

These start at 1% for employers and 1% for employees, rising to 3% for employers and 4% for employees, plus 1% tax relief, by October 2018.

Employers also now need to be aware that under the Financial Services Authority’s (FSA) Retail Distribution Review (RDR), from 1 January 2013, advisers that help to set up a GPP must be paid via a consultancy charge negotiated with employers, rather than on a commission basis from pension providers.

Employers can opt to pay the charge themselves or remuneration can be deducted as service charges from employees’ GPP accounts.

In July 2012, the DWP issued clarification on a FSA update that had caused some confusion for advisers about the way in which they could structure fee arrangements when launching a GPP for an employer for auto enrolment purposes.

The FSA issued guidance in June 2012 that a consultancy charge could not be taken from pension contributions if it reduced the minimum contribution rate required for auto-enrolment. There was some concern that this would mean advisers would have to be paid either directly by the employer or would end up not being paid at all.

Consultancy charge
The DWP clarified that a consultancy charge can be deducted from pension contributions, but only if this deduction does not reduce the value of the pension contributions to below the legal minimum requirement of 8%.

Any breach of this rule will result in the GPP becoming non-compliant for the purpose of auto-enrolment. However, the DWP said charges could be deducted from an employee’s pension fund once contributions have been paid to their scheme provider.

The FSA has decided not to apply its RDR rules to pre-RDR GPPs, which means that legacy schemes will not be subject to the financial watchdog’s ban on advisers’ commission-based payment structure.