What is a group personal pension (GPP)?
A GPP is a contract-based pension scheme that is arranged by an employer, but each scheme member holds an individual contract directly with the pension provider.
What are the origins of GPPs?
GPPs were launched in 1988, after personal pensions replaced retirement annuity contracts.
What are the costs involved?
A good workplace scheme with thousands of members will charge around 0.25% for passive funds, rising to 1.5% for actively invested funds. The 1.5% charge may seem modest but it is applied to the whole fund each year, rather than the amount invested. As an example, if an employee invested £1,000 a year and there is no growth, then after 20 years, they would be paying £253 a year in charges, almost 25% of their annual contribution.
What are the legal implications?
A GPP must satisfy the government’s eligibility criteria if it is to be used for auto-enrolment. An estimated 1,500 employers have so far received non-compliance notices, with penalties ranging from £500 to £5,000 a day.
What are the tax issues?
Employee contributions paid into a pension scheme are currently eligible for tax relief, while employer contributions are free from tax and national insurance.
Where can employers get more information and advice?
National Association of Pension Funds on 020 7601 1700 or at www.napf.co.uk.
The Society of Pension Professionals on 020 7353 1688 or at http://the-spp.co.uk.
Which GPP providers have the biggest market share?
The largest providers of GPP plans include Aviva, Aegon, Fidelity Worldwide Investment, 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?
Providers have been busy upgrading older schemes to render them compliant for auto-enrolment. They are much more interested in providing large schemes than in servicing small employers and pundits have predicted that many small firms may not be offered terms and will therefore be forced to use the quasi-government scheme, the National Employment Savings Trust (Nest).
Group personal pensions (GPPs) are arranged by employers which then make monthly contributions into each participating employee’s pot, but the contract is between the employee and the pension provider. The benefits in these plans are based on the contributions paid in and the investment returns made, rather than any link to the employee’s salary, so they are referred to as defined contribution (DC) schemes.
Under the new regime, scheme members aged 55 or over can now take their retirement savings from their GPP however they choose, with 25% of the fund available tax-free and the rest taxed as an income in the year of withdrawal.
Employees can use the government’s free Pension Wise service to help them assess which option is most suitable for their individual needs. However, following the changes, the government has been alarmed at how access to choice has been restricted by ‘excessive’ exit charges and a lack of independent financial advice for smaller savers. Therefore, following its Summer Budget, it announced a ‘radical’ review of the advice market.
The Summer Budget also introduced additional restrictions to contribution limits, and put in motion a consultation that could result in the disbandment of the entire pension edifice. The consultation document suggests replacing the system of tax and national insurance relief on contributions and instead offering a saving out of after-tax income, which would, for example, end salary sacrifice arrangements.
For employees, the amount that can be saved in a pension free of tax over the course of a lifetime is to be reduced from £1.25m to £1m from April 2016, and the £40,000 annual allowance that can be saved tax free in to a pension each year will be reduced for those whose total income is above £150,000.
Investment funds
A challenge for personal pensions of any kind is that outcomes depend completely on the funds chosen and their performance, and many individuals underestimate the amount they need to save for a comfortable retirement.
Employees are also often baffled at the range of investment funds available, to the extent that they make no choice at all and fall back on the scheme’s default fund. In the last decade, almost all GPPs adopted lifestyle funds as one of the default options. These funds invest in more active and equity-oriented funds in the early years of a member’s career and progressively switch to bond and cash funds five years before an employee retires. This was fine when people were forced to buy an annuity with their pension pots, because it consolidated the fund in the period leading up to retirement and prevented any shocks at a time when the employee would not be able to earn to recoup any losses.
However, now that people can choose both to work beyond retirement age and/or keep their pension pot invested in an income drawdown plan post-retirement, switching to cash at age 55 will deny them all-important investment growth at a time when their pension pot is at its largest. Schemes that have not addressed this issue will now need to.
Pension scheme governance
DC pensions governance was also overhauled in April 2015, including the introduction of independent governance committees (IGCs), which the government hopes will ensure that members receive better value for money. One of the issues IGCs must look at is whether the default funds are suitable for most members, as well as whether the provider is financially secure, and the standards of administration and the service level agreements are appropriate. Whether a scheme’s investment strategy is suitable for a particular workforce will depend on its particular employee demographic, and the government clearly expects employers to work closely with the committees.
Regulators are certainly extending their reach. For example, if an employee moves to a new employer, the contract reverts back to an individual basis, which has been taken to mean that the previous employer was free of any obligations to former staff.
However, another important development is the end of a dual charging structure known as ‘active member discounts’. From next April, employers will no longer be allowed to set up a scheme with a dual charging structure with fees that are cheaper when the employee is working with the firm, but reverts to a higher charging structure when an employee leaves service and is ‘on their own’.
Pension fund charges
In April, the government introduced a 0.75% cap on all pension fund charges following publicity about exorbitant charges in some legacy GPPs. However, while the cap remedies such iniquities, it has also hindered the development of state-of-the-art investment funds that use various derivative-style techniques to both take advantage of stock market growth while limiting the potential for losses.
Auto-enrolment
The introduction of pensions auto-enrolment legislation in October 2012 requires certain employees to be automatically enrolled into a workplace pension scheme. The minimum contribution is currently 2% of the member’s pay, of which employers have to pay at least 1%, with the rest coming from the member’s pay and tax relief. The minimum contribution will rise in stages to 8% by 2018, of which employers will have to stump up 3%.
Small and micro firms have staging dates to comply with the rules over the next two years. The Pensions Regulator has warned small employers that they must comply after new data showed that almost two-thirds of the UK’s 1.8 million small and micro firms do not know the exact date they needed to have a workplace scheme in place.
Automatic-enrolment has led to the number of active DC memberships exceeding final salary scheme memberships for the first time, according to figures from the regulator.
Statistics
3 million: The amount to which active membership of defined contribution (DC) pension schemes in the UK increased in 2014 (140%), while assets in non-micro DC schemes have increased by £3bn (11%).
300: The number of schemes being used for auto-enrolment by the end of 2014.
87%: The percentage of members who were in schemes being used for auto-enrolment.
(Source: The Pensions Regulator)
One in 10: The number of savers that could be affected by excessive exit charges, while roughly 7% of assets under management in legacy schemes were in schemes where 60% of savers would face exit charges of 10% or more. (Source: Department for Work and Pensions, February 2014)
£1.8bn: The amount withdrawn from pension schemes in the first two months after the pension freedoms were introduced (Source: Association of British Insurers).
2.9%: The average contribution rate of pensionable earnings for members in private sector DC schemes and 6.1% for employers, while members contributed 5.2% in to private sector final salary schemes while employers contributed 15.4%. (Source: Office for National Statistics, September 2014)
