Group personal pension schemes have had a difficult couple of years, and employers and providers are now gearing up to meet the challenges of legislative changes, says Nicola Sullivan
The group personal pension (GPP) market has been boosted by employers continuing to migrate from final salary pension schemes to defined contribution (DC) plans. But it has also been hit by the recession and is yet to weather the impact of the implementation of legislation such as the 2012 pension reforms, as well as the Retail Distribution Review (RDR).
In 2009, sales of contract-based pensions fell sharply as the recession, unemployment, pay freezes and legislative changes all impacted on the market. For example, Aviva's group pension business fell by 55% to £462 million from more than £1 billion in 2008. Its interim results for the six months ended 30 June 2010 were also lower at £2,061 million, compared with £2,089 million for the same period in 2009.
Similarly, Friends Provident's group pension sales fell 26% to £310 million during 2009, down from £423 million in 2008. It also reported a 13% drop in new business sales to £873 million compared with more than £1 billion the previous year. In the first quarter of 2010, group pension sales at Friends Provident were £66 million, down 5% on the first quarter of 2009.
Many employers might also be suffering from a planning blight, with many reluctant to introduce new pension arrangements or change their existing schemes given that potential new legislation is currently under government review (due to report at the end of September). Potential changes include income tax hikes for high earners and workplace pension reforms, due to come into effect from 2012 onwards, which should see the introduction of compulsory employer and employee contributions, auto-enrolment, and the national employment savings trust (Nest) - an alternative to workplace pension arrangements.
Plans to cut tax relief
In addition to the tough economic climate, one of the biggest headaches for the industry and employers was the former Labour government's plans to cut pensions tax relief for higher earners. Many providers feared these proposals would denigrate the importance of workplace pensions because senior employees and company executives would no longer be as keen to endorse them as a benefit.
But, on the whole, the pensions industry has broadly accepted the coalition government's plans to scrap this strategy and work with the industry to come up with an alternative, such as significantly reducing the annual allowance. Ian Buchan, corporate development manager at Standard Life, says: "The higher earners' tax situation has been a complete stress for the entire industry. The new proposals are much more simple."
Another issue providers have had to contend with is the almost definite introduction of auto-enrolment and Nest. Ann Flynn, head of marketing and communications for corporate pensions at Scottish Widows, explains: "The key thing from a provider perspective is that our proposition is what the market needs now, in 2012 and beyond.
"Product development is going to become more customer-centric. It already is, to a certain extent, but we really are aware of the fact that one of the big problems in DC pensions in the UK is engagement. People just do not want to commit their money for the long term and reasons such as inertia are making them not want to join a company pension. Auto-enrolment will change that, but then there is the challenge of keeping people engaged."
Simon Butler, proposition development manager for corporate benefits at Axa Sunlife, adds: "The fate of the GPP is likely to depend on the success of Nest introduced by the Pensions Act 2008. It is possible GPPs will simply evolve to meet the characteristics of Nest, and beat it on administration costs given the 2% contribution charge to be levied until the loan from the government to set up Nest has been repaid, but only time will tell."
Extra costs of auto-enrolment
The forthcoming pension reforms have also raised concerns about whether employers will level down their existing pension provision to meet the extra costs associated with auto-enrolment and compulsory minimum contributions.
However, some employers will get round this by segmenting their employees into different groups, and using Nest as a starter pension until an employee become eligible for further entitlements. Dave Hodges, client relations director at Zurich Life, says: "While there will be some employers reducing contributions, I strongly suspect that employers will probably put employees into categories, which will increase the bill for them, albeit not in a horrendously serious way. Nest could be used as the strategic pension option for part-timers or the low-paid."
The GPP marketplace will also be shaken up by the RDR, which will end the practice of corporate advisers and employee benefits consultants being remunerated by commission paid by group pension providers. Under the legislation, which is due to be enforced in 2013, employers will pay a fee and/or an ongoing consultancy charge to their consultant or corporate adviser. This will ensure both parties will be able to agree upfront how much investment advice will cost and how employers will pay for it.
Charges for advice will put off staff
Paul Goodwin, head of pensions at Aviva, says employees could be put off paying into a pension scheme if they discover charges for advice. "The way that consultants will charge means the employee will see a deduction from their plan to pay for advice," he says. "We need to be really careful on how that is communicated to employees. Some might perceive that it is not a good thing for them and will stop paying into their pension. Then we are in the worst of worlds, which is when people stop putting money into pensions."
This has led to speculation about whether trust-based DC schemes, which are unaffected by the RDR, will become a more popular option. The appeal of trust-based schemes over contract-based plans lies in the fact that they give employers more flexibility and control. For example, employers can receive a refund of contributions if they have a high staff turnover during the first couple of years.
Some employers also feel more comfortable with trust-based arrangements because trustees not only take some of the responsibility for pension scheme risks, but can also make changes to investments without obtaining scheme members' consent.
Standard Life's Buchan says: "Trust-based schemes can, and probably will, play a very important part going forward. We are seeing quite a few [employers] putting in place trust-based schemes. The tide will always go towards contract, but you will get a number of larger employers who put in well-thought-out strategies that will involve trust-based arrangements."
Although it may seem the GPP market is facing challenges from all angles, in the current economic climate, perhaps its low-cost appeal will help it win through.
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Focus on facts
What is a GPP plan?
A group personal pension (GPP) is a type of contract-based pension scheme organised by an employer. Employees hold individual personal pensions directly with the pension provider.
What are the origins of GPPs?
GPPs were introduced in 1988 when the government replaced retirement annuity plans with personal pensions. In an effort to compete with stakeholder pensions, costs were reduced in 2001 and, since then, schemes have extended their investment options to remain competitive.
Where can employers get more information and advice about GPPs?
The Society of Pension Consultants is the representative body for pension consultants and advisers.
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In practice
What are the costs?
Flat annual management charges without commission are typically between 0.3% and 0.4%. Some employers operate an active member discount, with staff paying 0.25% when they are working for an employer and 0.4% when they leave.
What are the legal implications?
Employers with at least five eligible employees must offer a pension arrangement. If a GPP is the only scheme they offer, employers must contribute the equivalent of at least 3% of a member's salary. Employers do not have legal responsibility for the scheme once it is up and running because there are no trustees, and employees hold contracts directly with the pension provider.
What are the tax issues?
All contributions are eligible for NI and tax breaks. Staff can pay in up to 100% of salary each year, but only get tax and NI breaks up to £255k (likely to be cut to £30k-£45k).
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Nuts and bolts
What is the annual spend on GPPs?
Figures on the total size of the GPP industry are not available, but information from the Association of British Insurers shows that the annual premiums for 2009 amounted to £4,069,486.
Which providers have the biggest market share?
Again, no figures about market share are available, although large players include Aegon, Aviva, Friends Provident, Legal and General, Prudential, Scottish Widows, Scottish Life and Standard Life.
Which providers increased their market share most in the past year?
Many providers have experienced a fall in sales for 2009 and 2010.
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