Under a group personal pension (GPP), an employer agrees to make monthly contributions into the scheme, but the contract is between the employee and the pension provider. Currently, a GPP ends when the member retires and buys an annuity with the proceeds, so there is no obligation on the employer to pay retirement benefits to the employee for the whole of their life, as was the case with final salary schemes.
If the employee moves to a new employer, the contract reverts back to an individual basis, leaving the previous employer free of any obligations to former staff.
But changes announced in the 2014 Budget allow greater flexibility in employees’ retirement options. From April 2015, scheme members aged 55 or over can take their retirement savings from their GPP in any way they choose, with 25% of the fund available tax-free and the rest taxed as an income in the year of withdrawal.
Pension scheme members will also be offered free guidance from an independent third party to help with retirement planning.
Pension scheme governance
Gone are the days when GPP governance was considered a light touch for employers. The Pensions Regulator (TPR) has introduced regulations governing scheme best practice, including its six principles for investment governance, covering initiation, set-up and design, ongoing monitoring, reviewing and communications.
In November 2013, TPR released its defined contribution (DC) guidance document, Regulatory guidance for defined contribution schemes to help trustees meet the standards the regulator deems sufficient. These service levels include making sure all members are regularly made aware of their scheme’s current investment strategy and what it means for them, and ensuring that the costs and charges are good value for members in relation to the benefits and services provided.
Trustees should also clearly disclose all fees and costs to members at the point of selection, and offer flexible contribution structures to enable members to save more if they choose.
TPR also suggested ways to help scheme members optimise their retirement fund, such as by ensuring pension providers regularly inform them of their contribution levels and give advice on maximising their income at retirement.
These changes follow the introduction of pensions auto-enrolment legislation in October 2012, which requires employees to be automatically enrolled into their workplace pension scheme if they meet the required criteria.
Pension fund performance
A key criticism of GPPs, and any other money purchase-style schemes, is that outcomes depend completely on the funds chosen and their performance. The difference between investing in the best and worst fund can mean riches or penury.
Employees often invest in a fund and do not subsequently change it if their economic circumstances change. This is particularly risky for employees approaching retirement, who may be better placed to use more passive funds and to consolidate any gains made up to that point to prevent unnecessary losses. Of course, this depends on a member’s required retirement fund outcomes.
In recent years, pension providers and employers have recognised these weaknesses. Most GPPs now offer a lifestyle fund, which invests in more active funds in the early years of a membership and progressively switches to a relatively stable bond and cash fund five years before an employee retires. Employers must offer a default option for any employees who feel unable to select their own funds, and this will usually be a lifestyle fund.
The future
From April 2015, there will be a 0.75% cap on all managed pension charges to help employees build up the best retirement income possible. The government has estimated that the cap will create an extra £195 million in pension contributions over the next 10 years.
The cap was announced on the same day that the government abolished compulsory annuity purchase on retirement. Employees aged 60 or over are now also allowed to take a maximum of £30,000 from their pension lump sum, up from the previous figure of £18,000.
There has also been a reduction in the amount of guaranteed income needed in retirement to access flexible drawdown, which has dropped to £12,000 from £20,000 a year. The size of a small pension pot that can be taken as a lump sum has increased five-fold, from £2,000 to £10,000.
In 2016, adviser commissions will be removed from members’ funds and minimum standards brought in for those saving via auto-enrolment. Between now and 2017, four million more employees will join a workplace auto-enrolment pension scheme.
What is a group personal pension (GPP)?
It is a contract-based pension scheme that is arranged by an employer, but each scheme member holds a personal contract directly with the pension provider.
What are the origins of GPPs?
GPPs have been around for more than 25 years. They were 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? ?
According to the National Association of Pension Funds, the average annual management charge (AMC) on GPPs can range from 0.004% to 1.2%. Charges on pension schemes have fallen over the years, although some long-standing schemes may still have high charges. This is set to change in April 2015, when a 0.75% cap will be introduced.
What are the legal implications?
A GPP must satisfy the government’s eligibility criteria if it is to be used for auto-enrolment. The Pensions Regulator can impose fines of up to £10,000 a day on organisations with a non-compliant scheme.
What are the tax issues?
All employee contributions paid into a pension scheme are eligible for tax relief, while employer contributions are free from tax and national insurance. Employees can make gross contributions of up to £2,880, which becomes £3,600 with tax relief, whichever is greater. The annual allowance was reduced from £50,000 to £40,000 in April.
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 Worldwide Investment, Friends Life, HSBC Workplace Retirement Services, Legal and General, Prudential, Scottish Life, Scottish Widows and Standard Life.
What have the main GPP providers been up to over the past year?
Pension providers have been working with employers to upgrade older schemes ahead of auto-enrolment. Tens of thousands of new employers are setting up schemes for the first time, and providers have been providing online technology to help them comply on time.
Statistics
320,000 - defined contribution pension retirees each year will all have complete control over how they access their funds.
Source: Budget 2014, published March 2014
£195 million - The estimated increase in pension savings over the next 10 years due to the government’s annual management charge cap.
Source: Budget 2014, published March 2014
£25,000 - Average DC pot size at retirement.
Source: The Pensions Regulator, DC Trust: A presentation of scheme return data 2013-14
2.7 million - pension members are in DC schemes, a 15% year-on-year increase on 2013.
Source: The Pensions Regulator, DC Trust: A presentation of scheme return data 2013-14
50% - of employees now pay into a pension scheme after auto-enrolment led to the first increase in workplace savings since 2006.
Source: 2013 Annual survey of hours and earnings: summary of pension results, Office for National Statistics, March 2014
