Self-invested personal pensions are putting the popularity of GPPs under pressure as employers and employees seek greater flexibility in their investment options, says Tom Washington
If you read nothing else, read this…
– Group personal pensions (GPPs) are a contract-based defined contribution occupational pension vehicle.
– Their popularity was threatened in 2001 with the introduction of the stakeholder pension, a cheaper, simpler option.
– Group self-invested personal pensions (Sipps) are popular for investment-savvy staff, with far more fund options than GPPs.
– GPPs may come under a new threat in 2012, when personal accounts could become a popular option for employers to offer for most of their staff.
Having received a barrage of blows in the past decade, defined benefit (DB) pension schemes are on their last legs, opening the way for defined contribution (DC) plans to step up. For a while, it looked like group personal pensions (GPPs) would be a real contender. Despite the threat that came with stakeholder pensions in 2001 and their relatively high cost, GPPs remained popular with employers wanting to provide a wider choice of investment options, with most offering more than 50 external funds.
But now group self-invested personal pensions (Sipps) are threatening the popularity of GPPs. The tax and benefit rules for all types of personal pension remain the same, but investment choices are widening as Sipps offer greater flexibility. While GPPs allow investment in managed funds, Sipp members’ options range from direct equities to commercial property.
Sipps have become a mainstream pension arrangement in a relatively short space of time, and are growing in popularity. According to Standard Life, at the end of the first quarter of 2009, its group Sipp volumes had increased by 33% and accounted for 47% of total group pension sales.
Andrew Tully, senior pensions policy manager at Standard Life, says one increasingly popular use of Sipps is to hold share options for staff who want to transfer maturing company shares from a sharesave plan into their pension in a tax-efficient way. “”We have developed a proposition for some major clients, offering a single company share tracker fund which is invested solely in the employer’s stock,”” says Tully.
“This means employees who buy or sell units in the fund do not have to pay individual dealing costs and will also enjoy the tax advantages of flipping company shares into their pension. There are 10 million employees with share options in FTSE 350 companies alone, so there is huge scope for this area to further increase in popularity.”
Sipps do have higher administration charges than GPPs, but for investment-savvy employees, this can be a price worth paying. Nicky Benstead, a consultant at Towers Perrin, says: “Our view of GPPs is they have fallen between stakeholder pensions for employers and employees who are looking for simplicity, and group Sipps for employers wishing to offer wider investment facilities, including share rollover options. They have always seemed a bit of a compromise product, in a way.”
Employers may use the introduction of personal accounts in 2012 as an opportunity to step back and consider what role they want to play in providing staff pensions. Some may offer personal accounts, some their own pension arrangements, and others a mix of both. The path employers choose could shake up the pension market and have a negative impact on GPPs.
Some employers may want to enhance their pensions offering to differentiate themselves from the basic, one-size-fits-all personal accounts scheme, as well as to appear more paternalistic. The danger for GPPs is employers that switch to personal accounts as the bottom layer of their benefit structure, while offering more compelling options, such as Sipps, to senior staff.
Benstead says it is hard to see why many smaller employers, or organisations in particular industry sectors, would continue to offer a company pension to the vast majority of staff when personal accounts are available. But Sipps have a brighter future, he says. “We are increasingly seeing group Sipps being introduced for all employees rather than just the senior cadre and we see no reason why employers would withdraw the Sipp facility for some staff after personal accounts arrive.”
Simon Pardoe, development and marketing director, workplace savings at Legal and General, says: “More and more employers are realising the value of a group Sipp arrangement to provide a single, cost-effective solution to the differing needs of all employee groupings. Not only are these employers seeking to future-proof their benefits strategies with an eye on 2012, but also they are seeing the value in providing an integrated approach to facilitating employees being able to save for their future in a flexible and tax-advantageous way.”