GPP providers are gearing up for pensions auto-enrolment, which they no longer see as a threat but a significant opportunity, says Bob Campion

Group personal pensions (GPPs) have become one of the most popular forms of workplace pension in the last five years.

According to research by Datamonitor, the market for GPPs has grown by 16 per cent, while stakeholder pensions declined by 25 per cent, since 2006. That dynamic has largely been driven by companies’ need for simple, cost-effective defined contribution schemes to replace final salary arrangements now closed to new employees. But as auto-enrolment builds up a head of steam following its official launch in October, will the government project prove a thorn in the side, or a feather in the cap, of the buoyant GPP market?

It is not difficult to see why GPPs have been thriving. For cost-conscious employers looking for the easiest way to provide staff pensions it is the obvious choice. With charges as low as 0.4 per cent a year, according to the most recent DWP survey, and access to up to 1,000 funds with administration and communication thrown in, GPPs provide an all encompassing service. Trust-based DC schemes, by comparison, allow much greater flexibility and tailoring to the requirements of the corporate. But they are more complex, requiring a body of trustees governed by trust law, a team of advisers, in-house pensions support plus selection and ongoing monitoring of the various service providers such as administrators or fund managers. The trust-based option may suit large corporates looking to differentiate their employee benefit package from rivals in order to attract and retain staff. But for most, GPPs have provided sufficient choice. From late 2012 onwards, however, the game is about to change, with new players and new rules. Will GPPs continue to dominate?

As all pensions professionals will know, companies will be obliged to automatically enrol their workforce into an occupational pension over the next few years. The deadline for complying with the new regulations is October for the largest employers – those with 120,000 employees or more – gradually extending out to 2016 for the smallest – those with fewer than 50 staff. On the face of it that should be fantastic news for all pensions providers as it will inevitably create a massive influx of new pension savers. But many experts had voiced fears that a new breed of supertrust pension schemes, designed to cater for the thousands of employers which currently have no suitable pension scheme to enrol their staff into, will wash away the GPP market in their vast wake.

Chiefly that means Nest, the government-established retirement plan, but also a small number of rivals such as NOW: Pensions and B&CE Benefit Schemes. Nest is undergoing a pilot phase before auto-enrolment kicks in and it boasts a simple, user-friendly approach designed to be easy for employers to implement and simple for its members to understand, but with a rigorously governed, sophisticated machine under the bonnet. Not only that but it will be accompanied by an all singing and dancing PR, marketing and general communications campaign. Is there a risk rival pension plans will struggle to compete? “There is some risk if people think that Nest is the only solution,” says Scottish Life business development manager Jamie Clark, “when in fact it is not suitable for many employers. In all there is not as much risk as you would think.”

Nest has worked hard to ensure its proposition caters well for the average worker, offering a very small range of funds with attention focused on the default option, which is a diversified fund with risk levels that automatically vary dependent on the age of the staff member. It is designed to make compliance with auto-enrolment duties straightforward and is as low cost as could be managed. But crucially for the GPP providers there is an annual cap on contributions of £4,400 in 2012/13, rising with inflation each year, or 12 per cent of a salary just below the 40 per cent income tax band of £35,001 for the 2011/12 tax year.

This makes Nest an unattractive option for higher earners who wish to make larger contributions and means employers will be obliged to provide an alternative for their senior staff or choose another option altogether for everyone.

It is notable that the staff of Nest itself will be offered an Aviva GPP
as a top-up scheme in addition to Nest to enable total contributions of 13 per cent of salary. The legal minimum annual contribution to a company pension will be 8 per cent by 2018, with employers paying at least 3 per cent. But many companies will have staff whose contributions will be over the Nest ceiling even at this minimum rate. GPPs are set to become a standard bolt-on for companies offering Nest as their basic solution to the auto-enrolment requirements.

But GPP providers go further than this, arguing that their offering competes well with Nest across a wide selection of features. Their investment fund ranges are much broader, catering for the more sophisticated or self-directed scheme member unsatisfied with a default option. And GPP providers are working closely with advisers and clients to identify a blend of funds suitable as the engine of a default option with risk-managed lifestyling organised on the top.

Nest’s annual management charge is 0.3 per cent with an initial charge of 1.8 per cent, equating to 0.5 per cent a year over 20 years. Most GPPs are already competitive with that price, although external fund costs can be as high as 2.82 per cent according to a DWP study. But the biggest question mark is over administration, and how easy employers will find complying with auto-enrolment legislation if they use a GPP.

Some providers have already launched web-based compliance tools that they argue will make their GPPs even easier to use than Nest because the functionality is more sophisticated. Scottish Life, for instance, is testing an online dashboard that will help employers keep track of the compliance status of each staff member, with the GPP linking into internal payroll systems; a helpline would support the process.

This type of online system, offering deeper analysis and more support to employers than Nest, will be critical to the continued success of GPPs and is one area where providers are visibly upping the ante. “Any provider that wants to stay in the market has to provide this,” adds Scottish Life’s Clark.

Nest was never expected to prove a thorn in the side of commercial pensions products, because it is designed to cater for lower income and transient workers with no alternative. As the first staging dates draw near, that expectation looks like it is about to be realised. “I think the vast majority [of our clients] will use existing schemes with modifications,” says Buck Consultants head of DC and wealth Philip Smith. “For clients with large transient populations, Nest might be considered.”

Providers are focusing on the sophistication of their proposition, recognising that employers unable or unwilling to use Nest will expect higher quality from commercial organisations. “A lot of providers are looking to improve their GPP proposition,” says Jelf Employee Benefits consultant Jonathan Wood. “Some are talking about making them more like corporate wraps, more flexible.” For advisers like Wood, auto-enrolment is a significant call to action and an opportunity to expand their corporate pensions advice. “Ninety-five per cent of every initial meeting in the last two years has started with a discussion on auto-enrolment,” he adds.

Employers have been eager to understand the implications of auto-enrolment, and to consider their options, even though their staging deadline could be three years away. For employers with existing GPPs, auto-enrolment is a trigger to review their charging structure, their fund ranges and their contribution rates.

While most existing GPPs should comply with the regulations, many companies will be expected to upgrade their governance processes and look again at their default fund. With transfers into or out of Nest not allowed, at least not initially, it makes little sense for companies already offering GPPs to switch out into the government-backed option, but employees will expect a pension that does more than simply tick the compliance boxes; it must be competitive with Nest and other industry rivals.

Even small employers not currently offering a pension may find that Nest is not the logical choice, particularly if by their 2014 or 2015 staging date Nest’s investment performance has been disappointing or it has received poor publicity for other reasons. With 1.2 million employers in the UK, 900,000 of them small businesses, there could be an almighty rush to either get into Nest or set up equivalent GPPs in the years to come.

Advisers and providers alike are recommending smaller businesses take steps well ahead of their deadline to avoid the rush. But given the size of the market they are communicating to, it is a message that has yet to become embedded in business plans. That will surely change over the next two years and only then will the fate of the GPP market become clear.

Written by Bob Campion, a freelance journalist

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