Market trends: Group Personal Pension Plans (GPPs)

Group personal pensions have faced various challenges over the years, and impending personal accounts could be the latest threat, says Sarah Coles

Just as the demise in popularity of pop idol Madonna has long been predicted, the same fate has been mooted for group personal pension plans (GPPs). Many thought newcomers would make them both appear outmoded, but somehow they have kept reinventing themselves. Yet, in the case of GPPs their popularity may again be under threat.

Stakeholder schemes were meant to see off GPPs when the former arrived back in 2001. At that stage, GPPs were over-priced, and a lack of competition had meant they could remain so but the arrival of stakeholder changed that. Danny Cox, an adviser with IFA firm Hargreaves Lansdown, says: “Insurance companies looked at their GPP books and decided to re-price along the same structure as stakeholder pensions.”

GPPs do have some advantages over stakeholder schemes. They can offer a much broader range of investments and most offer links to over 50 external funds, compared with fewer than 20 that are typically offered within a stakeholder pension. Many GPP providers have also improved their websites in a bid to keep pace with the times. “The major players have good online functionality. You can view your pension and make fund switches online,” says Cox.

Ultimately, employers will base their decision about scheme choice on what suits their organisation. But GPPs currently seem to be winning the popularity battle. Chris Bellers, pensions technical manager at Friends Provident, says: “While we sold about the same number of new GPPs and group stakeholders in 2004, in 2005 we sold about 50% more GPPs than stakeholders. Since then, we are tending to sell GPPs at three times the rate of new group stakeholder schemes.”

After seeing off the threat from stakeholder pensions, GPPs then faced a battle with group self-invested personal pension plans (Sipps). Paul Rai, practice manager at IFA firm Towry Law in the West Midlands, says: “There’s a general drive to group Sipps, and a lot of Sipps marketing.”

Sipps offer an expanded range of investment possibilities, including the ability to switch personal shareholdings into a plan, and the chance to invest directly in commercial property. However, they were never a true threat to the more mainstream GPP. They come with higher administration charges in return for more investment flexibility and suit a small segment of the workforce.

“Group Sipps are popular with senior executives, especially when they can roll their share options into one,” says Cox.

In some cases, employers may combine a GPP with other pension schemes to offer a wider range of options. “[Sipps] are replacing senior management pensions. Employers can offer a GPP, topped off with a Sipp,” says Rai.

GPPs have emerged, therefore, as popular as ever among those seeking a contract-based option direct from a pension provider, as opposed to an occupational pension scheme that is sponsored by the employer and run by trustees. GPPs are also finding new fans among employers which previously ran occupational schemes.

Mark Polson, head of employee benefits at Scottish Life, says: “Some of the growth in the GPP [market] has been through employers switching from defined benefit and defined contribution occupational schemes, which are continuing to close or restructure.”

Bellers points out that occupational schemes have lost a lot of their advantages: “Before [pensions simplification last April], the tax rules meant there were significant differences between occupational DC schemes and contract-based GPP schemes. Generally, an occupational pension scheme enabled employers to pay more into the pension scheme, and members could also accrue more tax-free cash. Since simplification, these two major advantages have disappeared and the tax rules for both occupational and contract-based schemes are now broadly the same.”

Employers are also increasingly wary of employer-sponsored trust-based schemes. Cox points out that they face uncapped liabilities, which may be because final salary schemes have serious deficits that need meeting. Alternatively, concerns may have arisen as a result of the liabilities of a defined contribution scheme where employers remain responsible for employees’ money, sending letters and statements, and paying for all these services for staff even after they have left their employment.

Many employers are also having difficulties recruiting trustees. “The Financial Services Authority (FSA) said the standard of trustees was poor, so it introduced new standards. There are definitely lots of trustees looking at their obligations almost for the first time, and saying ‘this is scary, what else can we do?’” says Polson.

This is where group personal pensions often come in. However, providers cannot sit on their laurels, because they face two new threats. Kevin Painter, a principal at Mercer, says: “The Pensions Regulator has made it clear it will regulate all workplace pensions, including contract-based schemes.”

This means employers may need pension committees to oversee the performance of the funds, and could face issues surrounding the investment choices staff make.

There is also a new threat from the government’s new system of personal accounts, which is due to be introduced in 2012. Kevin McCaffery, head of marketing for corporate pensions at Scottish Widows, expects it to dramatically shake-up the market. “Some say personal accounts are another stakeholder. That’s not our view. This is more of a tangible intervention. The emphasis this time round is that employers are compelled to offer access to this vehicle if they don’t already offer a pension that meets the criteria. They must also pay into the scheme – the equivalent of 3% for every member of staff who has worked for them for three months. The default is automatic enrolment, so there are material differences.”

This poses a threat to GPPs, because if an employer wants to offer a GPP in place of personal accounts it must meet other criteria. Most already meet the minimum contribution terms of 3%, with average contribution rates that are approximately double this, according to McCaffery. However, he adds: “They are likely to fail on take-up. The average defined contribution pension take up is 50%.” The government may well insist on auto-enrolment for GPPs, which will, in turn, raise pension expenses. “Some finance directors will look at increasing costs and decide to opt for the minimum [contribution level] through a personal account instead,” says McCaffery.

GPPs will, therefore, have to work hard to maintain their business. Rai believes this will squeeze costs further, but he still sees a role for GPPs, offering an alternative range of funds from personal accounts.

McCaffery says that within the market now there is surprisingly little differentiation as many providers have very similar offerings and compete on the basis of the breadth of their external funds. “The key challenge for providers is to introduce differentiators. Historically, the selling point has been investment choice, but when you look at how many [staff] take up a full variety of funds, it’s not a great differentiator,” he explains.

Painter, meanwhile, struggles to see how GPPs can effectively compete. “It’s hard to see a role for GPPs,” he says.

So while personal accounts may well prove stiffer competition than either the stakeholder scheme or Sipps, GPPs may not be ready for their farewell tour just yet. These plans have already changed dramatically to gain in popularity, and it is in the best interests of massively well-resourced pension providers to ensure they continue to do so. The future of the market may be uncertain, but there’s every chance, a new form of GPP will somehow come out on top

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Focus on facts

What are group personal pensions (GPPs)?
A GPP is a type of contract-based pension scheme, which is organised by an employer, but employees hold an individual personal pension directly with the pension provider.

What are the origins of GPPs?
GPPs came along in 1988, when the government first introduced personal pensions. In 2001, in an effort to compete with stakeholder pensions, they became a good deal better value. Since then, schemes have added ever-increasing investment options in order to remain competitive.

Where can employers get more information and advice on GPPs?
The Society of Pension Consultants ( is the representative body for pension consultants and advisers, and is a good place to start.

In practice

What is the annual spend on GPPs?
There are no figures on the total size of the industry, however, information from the Association of British Insurers shows the annual premium equivalent for new business in 2006 was around £1.6bn.

Which GPP providers have the biggest market share?
No figures about market share are available, but major players are Standard Life, Aegon Scottish Equitable, Axa, Scottish Widows, Legal & General, Friends Provident, Scottish Life and Norwich Union.

Which GPP providers increased their market share the most over the past year?
A large proportion of business is not actually new but switched between providers. Most are reporting healthy growth. Friends Provident, for example, reports new business in 2006 up 53% from 2005.

Nuts and bolts

What are the costs involved?
Schemes are individually priced, but costs have dropped dramatically in the past five or six years. Annual management charges range from around 0.5% to 1.5%. If an employer uses a consultant their advice will be priced up separately, and will typically start at around £75 an hour.

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 at least 3% of salary to the plan. Employers don’t have legal responsibility for the scheme once it is up and running, as there are no trustees, and employees hold a contract directly with the pension provider.

What are the tax issues?
Both employer and employee contributions are eligible for tax breaks. Employees can pay in up to 100% of their salary each year.