Making the switch from defined benefit (DB) and trust-based defined contribution (DC) pension schemes to contract-based schemes, including group personal pensions (GPPs), is a well-established way for employers to reduce their exposure to risk, as well as the time spent on governance and red tape.
For a while earlier this year, however, the viability of GPP arrangements hung in the balance. Auto-enrolment, which will be required under the government’s planned pension reforms, due to come into effect in 2012, was feared to be in breach of the European Distance Marketing Directive and Unfair Commercial Practices Directive. After several months of uncertainty, the Department for Work and Pensions announced in May that the European Commission had confirmed auto-enrolment into contract-based schemes will be deemed consistent with EU law.
This was probably a huge relief for the thousands of employers that have a GPP in place and do not want the huge amount of work involved in setting up a new scheme, particularly since many may have switched from running other types of occupational schemes just a few years ago.
For an employer that does not have a pension scheme already in place, there are attractions in setting up a GPP ahead of the incoming system of personal accounts, which all employers without qualifying schemes will be obliged to offer. Employers with a GPP could be perceived as taking a more paternalistic stance towards staff than those that place employees in personal accounts, which may end up being seen very much as the government’s bare minimum. For instance, although the investment fund choices for personal accounts have not yet been decided, a GPP is likely to offer a greater, and probably superior, choice.
Although the charging structure for personal accounts is not yet known, the cost of setting them up, which is likely to include a complex IT system, must fall somewhere. The government has indicated to the insurance industry that there will be no state subsidy. It is anticipated the scheme costs will be met by charges paid by scheme members. Standard Life has suggested personal accounts will struggle to come in below 0.8% per annum, based on comparisons with a similar model in New Zealand.
Tim Schofield, technical consultant at Alexander Forbes Financial Services, says that in terms of presenting the pension as a valuable benefit, good advisers are prepared to arrange GPPs for just 1%, a charge which can include offering every member individually tailored advice about the investment choices appropriate for their risk profile. A good investment strategy can make all the difference to employees’ eventual retirement income.
There has also been much debate over whether employers may be tempted to reduce their contribution levels in a general levelling down of pension provision once personal accounts come into force. Employers will be required to contribute a minimum 3% on earnings between £5,035 and £33,500 with pensions reform. This is around half the average contribution to a GPP, but employer contributions have been rising voluntarily, rather than falling in recent years. Schofield believes the new legislation will not prompt employers to consider cutting contributions.
With GPPs contributions can be made through a salary sacrifice arrangement, which results in tax savings for employees, as well as savings on national insurance for both employers and staff. However, some industry experts believe that the government will not allow salary sacrifice to be used in relation to personal accounts.
Historically, one way in which GPPs have been able to score over other pension arrangements has been in their ability to accept protected rights pensions built up by staff under previous arrangements. From October this year, however, self-invested personal pensions (Sipps) will also be allowed to take in protected rights from State Second Pensions for the first time. Tom McPhail, head of pensions research at Hargreaves Lansdown, says: “Protected rights used to be a tangible reason why [employers] might favour personal pensions over Sipps, but now there are arguments in favour of Sipps and none the other way around. Sipps can do everything a GPP can do and more, at a similar price. My instinct is old-style GPPs are likely to go into a long-term run-off.” EB If you read nothing else read this…
n Group personal pensions (GPPs) will not be in breach of legislation concerning auto-enrolment under planned pensions reform due to come into effect in 2012.
n Personal accounts are likely to be cheaper than GPPs, but not by much, perhaps even as little as 0.2-0.3, while GPPs can be presented as a superior benefit in terms of fund choice, individual advice and servicing.
n GPPs have lost their status for accepting protected rights built up under previous pension schemes. Some argue self-invested pension plans now offer the benefits of GPPs minus the investment limitations.