Greater fund selection and lower prices are helping group personal pension plans to make a comeback, often at stakeholder’s expense, says Jamin Robertson
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Last November, telecommunications company Virgin Mobile announced it was closing its trust-based defined contribution scheme in favour of a group personal pension (GPP), citing onerous trustee obligations as the reason behind its decision. Other employers have since followed suit, according to providers. On the surface, the GPP market looks to be in good health. Figures from the Association of British Insurers (ABI) show new GPP business worth £292m in the first quarter of 2006, a £63m increase on the same period last year. However, they do not distinguish between money new to GPPs and that switching providers.
Steve Osbiston, regional director, London, for Baker Tilly Financial Services, says: “75% of our major clients have moved across to GPPs.”
Nic Nicolaou, head of corporate solutions at Hargreaves Lansdown, which acts as a financial adviser for clients with GPPs, has noticed a similar trend. “It looks reasonably rosy at the moment. Economic, legislative and fashionable trends seem to be pushing people to at least consider GPPs.” While there has been an overall trend towards contract-based pension schemes, GPPs have been the preferred option of late, particularly when compared to stakeholder schemes. This is despite the appeal of the cap on stakeholder charges, which limits fees to 1.5% of the fund for the first 10 years and to 1% thereafter. ABI figures, for example, show GPP business moved forward 28% in the first quarter of 2006 year-on-year, compared with 18% for stakeholder schemes. Paul Macro, head of DC pensions for Aon Consulting, says greater fund selection and price reductions have seen GPPs forge ahead. “We had a case recently where we asked a number of providers to tender, and the stakeholder [plans] came out more expensive simply because of additional reporting and administrative requirements that providers are required to do for the stakeholder which they aren’t for the GPP,” he explains.
The recent revival in GPPs follows a period of interest in stakeholders triggered by their 2001 introduction. “Stakeholders haven’t worked out as everyone thought they would. The charges for GPPs have come down, and the ability to offer basic passive funds to shop floor workers through to much more [sophisticated] funds to senior executives is very attractive,” adds Macro. Furthermore, employers are also finding it increasingly difficult to recruit pension scheme trustees as employees are unwilling to take on the job, with the Pensions Act 2004 and the Pensions Regulator making their onerous responsibilities quite clear. GPPs help them escape these obligations. The move away from costly defined benefit pension provision is adding to the demand for GPPs. Iain Oliver, head of corporate pensions for Norwich Union, believes the trustee headache has been partly responsible for the revival of contract-based pension schemes. “These days, trustees are expected to know the whole [scheme]. There’s huge pressure on them to make sure their skills are at an appropriate level. If they’re not and decisions are made inappropriately there are ramifications. If I were asked to stand as a trustee knowing what I know about the role of the trustee now, I would refuse.” In addition, the Pensions Act 2004 led to predictions that boards of trustees would try to reduce the risk for employers by closing additional voluntary contribution (AVC) arrangements and redirecting employees’ extra payments into contract-based schemes.
There is now evidence of this occurring. But while the industry appears on the surface to be in good shape, providers are operating in a competitive market and admit overall growth is not as strong as the figures suggest. A significant chunk of new business actually comes from employers which are opting to switch between providers rather than coming into the market for the first time. This affects profitability as providers find it difficult to recoup initial commission payments made to intermediaries. Mark Polson, head of corporate business at Scottish Life, warns the rebroking merry-go-round must slow or the market may face ramifications. “The GPP market as you’ve grown to know it is not sustainable in its current form. What we are all trying to do is take business off each other. I’d characterise it as a market that is probably caramelising itself. [Unless there is change], what will happen is that somebody will go bust.” Aon’s Macro agrees: “A lot of money that’s flying around is just moving from one insurer to another. They’re simply not getting to the stage where they’re recouping the initial outlay so I think one or two of the providers have said ‘that’s it, we’re not playing that game any more’.” Looking ahead, the GPP market shows little sign of losing favour among employers, although there is some debate over the likely effect of the group self-invested personal pension (SIPP). Abigail Morrison, marketing manager for Standard Life, views the group SIPP as a successor to the GPP. “Group SIPPs can look exactly like a GPP. It has a lot of upsides and no downsides. You can take a group SIPP and not switch on any self-investment. It then looks like, and has the same charges as a GPP, so why wouldn’t you?” Others also expect to see more blurring between the two products. Polson, however, is less convinced, pointing out that over 90% of scheme members go for the default option. “Why would you put something in place for 8% of [employees] rather than the 92%, when the 8% are likely to be the more affluent and are able to go and get independent financial advice?” There are signs that there will be continued growth in contract-based schemes as employers further restructure DB provisions, while providers may be faced with consolidation within this congested market.
What are group personal pensions (GPPs)?
A group personal pension is a type of personal pension organised by an employer. Employees that sign up to a GPP hold an individual personal pension with the provider. Employers normally contribute to the GPP, and must do so by at least 3% of salary if one is offered as an alternative to a stakeholder.
What are the origins of GPPs?
In 1988, personal pensions were introduced by the government. Group personal pensions allow the employer to contribute to individual pension pots grouped under the organisational umbrella.
Where can employers get more information? The Society of Pension Consultants (SPC) (www.spc.uk.com) is the representative body for providers of advice and services for both personal and occupational pensions.
What is the annual spend on the product?
While industry statistics do not distinguish between money that is transferred due to switch business and true new business, figures from the Association of British Insurers reveal new business figures of ¨£292m in the first quarter of 2006, up from ¨£229m year-on-year.
Which providers have the biggest market share?
No industry figures about providers’ market share are available but agree that Norwich Union, Standard Life, Scottish Equitable, Axa PPP, Scottish Widows, and Legal & General are all major players.
Which providers increased their market share most over the past year?
Norwich Union claims it has seen a good level of growth in GPPs and has not been adversely affected by switching business. Other big players mentioned above report healthy market, although much of this activity is actually in switching business between them.
What are the costs involved?
According to the Society of Pension Consultants, hourly fees for consultants usually range between ¨£70 and ¨£240. Each scheme is individually priced on a bespoke basis. Annual management charges can range from 0.5% to 1.5%.
What are the legal implications?
Employers with at least five eligible employees must offer a pension arrangement. If a GPP is the only option, employers are bound to contribute at least 3% of salary. GPPs are based on contracts between individuals and the provider, so there is no need for scheme trustees.
What are the tax issues?
Both employer and employee contributions qualify for tax breaks. Changes under pensions simplification allow most employees to pay up to 100% of salary into their pension funds.