What is a group personal pension (GPP)?
It is a contract-based pension scheme that is arranged by an employer, but each member holds a personal contract directly with the provider.
What are the origins of GPPs?
GPPs are 25 years old this year, having been introduced on the back of individual personal pensions, which were launched in the UK in 1988 to replace retirement annuity contracts.
What are the costs involved?
The average annual management charge (AMC) on GPPs is now 0.4%, but it can be lower. Charges on pension schemes have reduced over the years, although some long-standing schemes may still be based on high charges.
What are the legal implications?
If used for auto-enrolment purposes, a GPP must satisfy the government’s eligibility criteria. The Pensions Regulator can impose fines of up to £10,000 a day on organisations that fail to show they are making every effort to be compliant.
What are the tax issues?
All employee contributions made into a pension scheme are eligible for tax relief, while employer contributions are free from tax and national insurance. Staff can contribute up to 100% of their salary each year, but tax breaks apply only on up to £50,000 a year. The annual amount an employee can pay into a GPP is capped at 100% of taxable earnings or £2,880 a year, which becomes £3,600 with tax relief, whichever is greater.
Where can employers get more information and advice?
The Society of Pension Consultants on 020 7353 1688 or at www.spc.uk/com
Which GPP providers have the biggest market share?
The main providers offering GPP plans include Aviva, Aegon, Fidelity, Friends Life, HSBC Workplace Retirement Services, Legal and General, Prudential, Scottish Equitable, Scottish Life, Scottish Widows and Standard Life.
Which GPP providers have increased their market share most over the past year?
Last year, for instance, Aviva increased its GPP sales by 15% by taking a more targeted approach for larger schemes.
Under a GPP, an employer agrees to make monthly contributions into the pension scheme, but the contract is essentially between the employee and the pension provider, and ends when the member retires and buys an annuity with the proceeds, rather than conferring the obligation on the employer to continue paying benefits for the whole of the member’s life, as in a final salary scheme.
Also, if an employee leaves to work elsewhere, the contract reverts back to an individual basis, leaving the employer free of any obligations to former employees.
At retirement, an employee can withdraw a tax-free lump sum of up to 25% of their fund’s value. Most people buy an annuity, which is a type of insurance policy designed to provide an income in retirement, but they no longer have to.
Instead, the member can use his or her pot for income drawdown, keeping the fund invested and taking cash from it when needed, within certain restrictions designed to ensure the fund is not depleted too quickly.
In fact, the ‘group’ part of a GPP applies only insofar as better deals in investment fund charges may be on offer for arrangements where several members are making contributions.
Many insurance providers are even reluctant to take on new business except where a critical mass of employees will pay sufficiently high premiums and where staff turnover is low. Some small employers with a low-paid or itinerant workforce have in the past found it hard to find a provider at all.
Pension scheme governance
For many years, GPPs were seen as a lighter touch in terms of governance for employers, but The Pensions Regulator (TPR) is gradually reducing that advantage for GPP sponsors and has introduced regulations governing best practice in these schemes, such as its six principles for investment governance, covering initiation, set-up and design, ongoing monitoring, reviewing and communications.
Many observers believe it is only a matter of time before more rigorous governance is extended to all employer-sponsored pension schemes.
One driver is that, since October 2012, the government has introduced auto-enrolment legislation to ensure all employees are given access to a pension scheme by their employer, with contributions paid by the employer and the government.
Staff that meet the qualifying criteria are auto-enrolled into their employer’s scheme, which can be a GPP or other qualifying scheme, but can leave if they wish to. Employers must comply with the regulations in waves: the largest organisations went first, and smaller or newer employers have staging dates up until February 2018.
This has meant access to a pension scheme is becoming less problematic for small employers because several new providers have come into the market in recent years specifically looking at the vast volumes they may be able to achieve. Most of these new entrants are not structured as GPPs, but as master trust arrangements.
Pension fund performance
One critical challenge of GPPs, or any other money purchase-style arrangement, is that outcomes are completely dependent on the funds chosen and their performance. The difference between investing in the best and worst fund can mean riches or penury. Figures from Hargreaves Lansdown suggest that if an employee invested a lump sum of £10,000 into a pension plan 25 years ago, the best-performing fund would produce a fund worth more than £224,000, while the same investment in the worst-performing fund would have produced just £6,300.
Many providers let scheme members choose from a range of funds on their investment platform, which will often display a mind-boggling 2,500 funds of every variety. Research indicates that the best way to encourage employees to make an active choice of a fund that best suits their risk/return profile is to offer no more than 10 funds and give some clearly badged guidance as to their risk level.
Very often, employees put their money into a fund and do not subsequently change it when their economic circumstances change, so it may run for many years. However, one type of fund is rarely the best performer in all climates, and it is sensible to use low-risk funds in the last few years before retirement to consolidate any gains made up to that point and to prevent a market downturn wiping out the fund at a time when the member would have difficulty making it up again.
In recent years, providers and employers have recognised these weaknesses and most schemes now offer a lifestyle fund that invests in a balanced way during a member’s younger years and progressively switches to a relatively stable bond and cash fund five years before retirement. Employers always set up a default option for any employees that feel unable to make a choice, and this will usually be a lifestyle fund.
High fees have long dogged the personal pension market and the government has announced plans to tackle high and inappropriate charges. It will publish a consultation this autumn on the introduction of a cap on default fund charges.
One practice TPR does not much like is that an employee may be entitled to a group discount on fund charges while they are with a particular employer, but if they leave, although they can take their pot with them and continue to contribute to it, the life assurance provider may then raise the charges.
There are also issues around adviser fees. At the start of this year, the Financial Conduct Authority’s retail distribution review (RDR) was introduced with the aim of prohibiting the remuneration of advisers with commission taken out of financial products’ value. There was much discussion about how this could apply to GPPs because, arguably, it is crucial that employers setting up these arrangements receive advice.
The government therefore allowed consultancy charging, which enables employers to pay a professional adviser for pensions management work out of employee pension contributions. In May 2013, however, pensions minister Steve Webb announced a ban on consultancy charges in all auto-enrolment schemes from November, because he believes existing measures to prevent advisers deducting too high charges from members’ pots are inadequate.
The Office of Fair Trading has also been investigating defined contribution (DC) pension charging structures and says: “A number of schemes open for auto-enrolment appear to have built-in adviser commissions.”
For example, advisers may still be able to circumvent the ban by using platform charges, whereby a provider pays advisers for each scheme they introduce to sit on the provider’s workplace platform, for blending investment funds or for member communication and education.
- 89 investigations have been launched into potential auto-enrolment non-compliance by The Pensions Regulator so far, mainly around not communicating the arrangements to staff properly. (The Pensions Regulator, July 2013)
- 70% of respondents agreed or strongly agreed that language and definition of investment risk needs to be redefined to ensure pension members understand it. (JLT 250 Club research, January 2012)
- 77% agreed or strongly agreed that more needs to be done about ‘active governance’ of default funds. (JLT 250 Club research, January 2012)