Buyer’s guide to group personal pensions (October 2009)

Sales of group personal pension schemes are thriving as employers look to shed the burden of trust-based plans and start planning for the 2012 pension reforms, says Ceri Jones

The group personal pension (GPP) market is experiencing a second wave of growth as some employers switch from trustbased pensions to contract-based plans such as GPPs, often having already moved from final salary schemes to trust-based money purchase plans, says Ann Flynn, head of scheme acceptance at Scottish Widows.

This is often part of a bigger review of an employer’s whole benefits strategy, which may involve putting a pensions salary sacrifice scheme in place at the same time.

A big differentiator between GPP products is how investment choices can be structured. Some plans are linked to 200-300 funds on various platforms, but having a big choice of funds can be baffling and counterproductive in terms of employee take-up. The most common model is known as the core and satellite, in which an adviser chooses a manageable range of eight to 10 funds and explains them in detail in written pensions literature for staff. A wider fund choice is then available on request, often online. Most providers offer a questionnaire or web tool for staff to gauge their appetite for risk, directing them to one of a range of three to five risk-based default funds that form part of the core selection.

Employee engagement

A core-and-satellite approach can improve employee engagement, often boosting the percentage of members that actively select a fund to 30-35%. But if hundreds of funds are offered indiscriminately, active selection drops to 10-20%, with 80-90% going into default funds, says Julian Webb, head of defined contribution (DC) at Fidelity.

In practice, most staff opt for the default fund. This is an issue because once an employee has joined the scheme, inertia all too often sets in and funds are seldom, if ever, reviewed, so the member may languish in a poorly-performing fund for years, or remain in one that no longer suits their circumstances.

According to the PensionDCisions Default Strategy Survey 2009, published in April, at least 10% of plans have not been reviewed for two years. The Pensions Regulator and the Financial Services Authority (FSA) have talked about improving the situation.

Providers are therefore addressing the governance issue around the investment setup. The holy grail is to create a scheme that can work with minimal input from members. Scottish Life has been promoting its Governed range of five risk-profiled portfolios, which it claims offer an end-to-end solution, enabling advisers to tailor schemes to meet employers’ specific needs.

Tailored portfolios

Similarly, a big selling point at Fidelity is its facility for tailored portfolios, which allow the adviser or employer to construct and monitor a range of investment portfolios designed for a particular workforce. Providers generally monitor their fund range through independent research houses such as Old Broad Street Research and Morningstar. Webb says an adviser or employer may be more likely to fire poorly-performing fund managers, but a provider may be more reluctant to do so because of the effort or cost involved, or because a reduction in the level of funds placed with a certain manager could upset the annual management fee structure.

An important development in the GPP market is a desire to reduce reliance on equities to avoid the extreme fluctuations of the stockmarket cycle. Fidelity’s tailored funds can be built from a range of multi-asset funds and alternative investments, such as hedge funds, currency and property, in an effort to shield members from the volatility of pure equity investments. Diversified growth funds invested in a wide range of asset classes are also offered by Standard Life and BlackRock.

Automatically switching gains

BlackRock also offers an option to automatically switch gains made from equities into the safety of index-linked gilts. But this has not enjoyed the traction of mixed-asset funds. Steven Rumbles managing director and head of UK DC at BlackRock, says: “It would help if more than one provider offered this type of product. But although the concept is easy, the algorithms used to develop it are complicated and require skill.”

Initial commission is a thorny issue in this competitive marketplace. Scottish Widows, Aviva, Aegon Scottish Equitable and relatively new entrant Zurich Life are all big payers of initial commission to advisers, offering 20% or even 30% of the first year’s premiums. Others, such as Scottish Life, Prudential, Standard Life, Friends Provident and Axa, operate a nil initial commission policy or limit it to about 5%.

Alasdair Buchanan, head of communications at Scottish Life, says a provider will be happy to remunerate an adviser that has churned an existing scheme because it will have accrued a few years’ contributions, resulting in a high annual management charge.

Transparent commission

This issue hit the headlines recently after moves by the FSA and the Pensions Regulator to ensure commission is transparent and does not influence advisers. The FSA is consulting the industry on whether GPPs should fall into this regime, and will clarify its proposals soon. It is currently unclear whether an employer would cover the costs of basic advice or flat charges should be applied to all members.

The introduction of personal accounts in 2012, which will herald auto-enrolment, is also starting to influence the marketplace. Martin Palmer, head of corporate pensions marketing at Friends Provident, says a split is emerging between those employers that are, and those that are not, focusing on how they can differentiate their offering from personal accounts by addressing their employees’ needs and taking credit for the effort and money they put in. A better contribution rate, investment proposals and online presence can all be used to personalise a scheme.

Some big employers see personal accounts as a way to sweep up a swathe of the workforce, says Paul Goodwin, head of pensions marketing at Aviva. “Retailers, for instance, might like to implement a more generous GPP scheme for managers and use personal accounts for shopfloor staff. At the other extreme, a small engineering firm may not want to operate two lots of payroll production and will need to ensure existing provision is good enough.”

With such issues for employers to ponder, the next few years could be an interesting time for the GPP market

Focus on facts:

What are group personal pensions?
Group personal pensions are set up by employers, for staff. The contract is between each member and the provider, freeing the employer of the risks associated with life expectancy and investment performance. Staff build up their own pension pot, but as the plan is arranged through an employer, it may have lower charges than an individual arrangement.

What are the origins of GPPs?
GPPs began in 1988 when retirement annuity plans were replaced by personal pensions. Costs are now in line with stakeholder plans.

Where can employers get more information and advice on GPPs?
The Society of Pension Consultants at:, and case studies and analysis at

Nuts and bolts:

What is the annual spend on GPPs?
No figures are available on the scale of the GPP industry, but the Association of British Insurers calculates that total new premiums in 2008 were about £2.52 trillion. A total of 78 new contracts were written in the second quarter of the year, up from 69 in the first.

Which providers have the biggest market share?
No figures about market share are available, but major players include Standard Life, Aegon Scottish Equitable, Scottish Widows, Legal and General, Friends Provident, Scottish Life, and Aviva. Providers with an asset management tradition, namely Fidelity and Blackrock, are also active at the top end of the market supported by employee benefits consultants.

What are the sales trends?
Most providers are currently reporting marginal sales growth, but with a stronger increase in group self-invested personal pensions (Sipps). At Standard Life, Sipps account for more than half of the group pensions sold. Prudential, Scottish Widows and Zurich Life are also active in this market.

In Practice:

What are the costs involved?
Schemes are individually priced. Some advisers are remunerated by commission paid by the provider, but some charge the employer by the hour, starting at about £80. In some cases, pricing is based on staff turnover, so organisations that have a high turnover may find it hard to obtain a quote. The only other cost is the annual management charge applied to members’ funds, normally 0.5% to 0.8% depending on the funds selected.

What are the legal implications?
Currently, employers with at least five eligible employees must offer a pension, and if a GPP is the only scheme offered, they must contribute 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 staff hold contracts directly with the pension provider.

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What are the tax issues?
Employer and employee contributions are both eligible for tax breaks. Staff can pay in up to 100% of their salary each year. Higher-rate taxpayers get tax relief of 40% on pension contributions, but in the last Budget, the government reduced higher-rate tax relief for people earning more than £150,000.

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