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The
pensions trial Launched in 1988, GPPs were front-end loaded up until 1995 when providers initiated a level charging GPP product. This provided the customer with new features including: penalty free transfer values, penalty free early retirement and the penalty free option of increasing, reducing or suspending contributions. The government launched its proposals for stakeholder in 1997 and followed this with a series of consultation papers. The FSA finally stepped into the ring in March 1999 with their statement on “material disadvantage”. The industry’s judgement that front-end charging was frowned upon ensured that the two-thirds of providers who had not developed level loaded GPPs quickly went down that road. The internet then became the focus, as it was the only way in which providers could survive within the one per cent restraints that stakeholder was putting on pensions. In fact, GPP products were already heading into the one per cent world more than a year before the first stakeholder products would be available. And now, five months after the introduction of stakeholder pensions, many providers have launched a look-alike GPP within the one per cent world. The
case for GPPs An important difference to note is that GPPs can go beyond the stakeholder CAT-standard of one per cent per annum. Stakeholder pensions cannot break this cap unless the extra charge is used to purchase additional features, for example external fund links. Some IFAs have argued that they prefer a GPP, because the ability for annual charges to go over one per cent allows them to provide further advice and services to the employer and their workforce. Charges can also be tiered. While some GPPs do not have fund tiering, which means that the annual management charge (AMC) taken by the provider remains the same as the fund grows, there are moves towards fund tiering. In October 2000, Royal & SunAlliance was the first provider to confirm it would adopt a fund tiering system arguing that not offering it was unfair to older scheme members. On the flip side, IFAs may feel that fund tiering was unfair on younger members. It is an interesting debate and one that continues, yet it appears that tiering is the way forward, not just with stakeholder and GPPs but with all defined contribution pension products. Advice continues to hold a central position in the pensions market. Consumers are always encouraged to seek advice before making a pension purchase. IFAs are looking to providers to help them adapt to the one per cent world by offering advice on scheme installation and the provision of e-enabled processes for creating and maintaining schemes. Most GPPs have a good range of funds available. IFAs want providers to include a range of external fund links in their GPP. Should the performance of the in-house funds deteriorate, the IFA can help the members by advising them to switch their contributions to the externally managed funds, a sort of insurance policy against the biggest charge of all, poor performance. But, what if the externally managed funds are managed in the same way and have the same equity content of the in-house funds? The performance of all the funds would then dip. Extra care must be taken by the provider to research and carefully choose funds that will not only complement but also broaden its existing fund portfolio, rather than merely adding extra funds to its existing range. Another GPP option that stakeholder seems to be struggling with is unitised with-profits fund options. To ensure fairness to other investors, stakeholder providers have to separate the proportion of the fund that is supported by their stakeholder customers and, because of this, some providers are still unsure about offering this fund option on their stakeholder product. No such problem accompanies GPPs. IFAs have been quick to place pressure on providers to reduce charges on the existing GPP so that they are at least in line with the new products available post April 2001. Therefore, in the run up to the launch of stakeholder, providers may have reduced charges for their existing customers with GPPs that had been in force for a while. The internet is also an essential tool for efficient service in the future, eliminating the group pensions paper chase when enquiries can pass from member to employer to adviser to provider and back through the same loop. The internet changes this because it allows online access to the records with the ability to update scheme details at the click of a mouse. GPPs can take as much advantage of the technology as the stakeholder market place, so neither product has a real advantage here. Finally, the jury should note the future of rider benefits in this trial. Existing members of a GPP purchased before April 2001 have the edge here as they can continue to have waiver and life cover as before while the market is still deciding what the future holds for members of post-April 2001 GPPs. Some IFAs are already plugging the gap with a group risk solution. However this has both disadvantages and advantages, for example, continuation options. The group risk contract is with the employer and not the employee so, should the employee leave that employment, he needs a solution that he can take with him to his new job. The
case against GPPs Stakeholder pensions are effectively creating brand awareness for pensions in the UK – an objective the GPP has as of yet failed to deliver. The stakeholder CAT-standard charge of one per cent acts as a catalyst for change. Up until April 2001, GPP products had such features as a bid/offer spread, policy fees and allocation rates lower than 100%. Without stakeholder, would the GPP have seen so many feature improvements? For example, would providers have utilised the internet to improve service for their customers? Compulsory employer contributions of three per cent of earnings remain in place with GPPs. Stakeholder does not have any element of compulsion – yet! But as the employer selects the contribution levels and the initial fund choice on a GPP, does that make it a more efficient product to create or does it add more administration burden to the employer? The case for stakeholder can be summarised by looking at how many products have been revamped and improved over the past three years as a direct result of the arrival of stakeholder. Arriving at a verdict will not be easy. The arguments for and against the GPP have been put forth and it is now up to you the jury to decide.
Andy Milburn is the promotions leader for IFA corporate business
at Royal & SunAlliance Life & Pensions BACK
TO SEPTEMBER FEATURES
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