In the first decade of the century, employers looking to put distance between themselves and the outcomes of pensions chose group personal pensions.
The personal pension was all that a company pension wasn’t, encouraging personal engagement with retirement issues with an insurance company and an employee benefits consultant only too happy to manage the education of employees here to then receiving accrual from a DB plan.
Many new businesses that never had dealings with pension trustees adopted group personal pensions as aligned to their values of “empowerment” and “self-determination”, the age of paternalism in pensions seemed to be over.
But this has not worked out well. For all the heroic assumptions that financial education could breed a new pension savvy employee, the bulk of us remain resolutely in the “I want it done for me” camp. The group personal pension is collective only in offering a uniform charging structure on a uniform set of investment choices, the rest is down to the saver.
Enthusiasm for GPPs has fallen sharply, they are no longer the flagship product of the insurers active in the workplace pension market. Other than Royal London, all the auto-enrolling insurers are now promoting master trusts as their favored solution to the benefit consultants who operate the secondary market while overseas new entrants to the UK employment market swerve the GPP for the now mature master trust market.
Government recognises this. The Pension Schemes Bill , announced in July is sponsored by the DWP and will focus on occupational DC plans. The FCA is playing catch-up on VFM and the investment pathways look to have been overtaken by the promise of default means to turn pots to retirement income, a key provision of the forthcoming bill.
The Group Personal Pension, both in sales and in regulatory attention, is in danger of becoming yet another legacy product, ripe to be upgraded into the master trust. Indeed insurers with master trusts (L&G, Fidelity, Aegon, Scottish Widows, Standard Life and Aviva) have already sharpened their tools to cut up the corpse of the animal it reared only a decade ago.
Pricing for master trust participation (still the key determinant for the secondary market) is determined on three key metrics
- Contribution per member
- Existing pot per member
- Accessibility of existing pots for transfer.
Switching 100% of contributions towards a master trust is easy , but harvesting the existing pots is hard. Pots are sticky as they need saver consent to switch, many savers are no longer with the sponsoring employer, the employer becomes complicit with the switch since the negotiable terms for entry to the master trust depend on the underwriting departments of the insurers. The underwriting largely focusses on the percentage of existing pots that can be consolidated into the master trust.
This is why the knives are being sharpened. There is complicity between the employer , the new provider (master trust) and the adviser to ensure that the corpse of the GPP is picked clean to the bone and as close as 100% of value is transferred.
The new kid on the block is the “bulk transfer”. Here the sponsor actively helps the transfer of pots from the GPP to the master trust by making employee time available to talk with specialists from the master trust, who can efficiently manage consents to transfer. That almost everyone is in default funds makes fund mapping a side-issue, for most people it is a no-brainer to switch and this can be an opportunity for a land-grab on other pots that might be available for pot consolidation.
The bulk transfer itself is a highly efficient process that relies on both parties (the ceding GPP insurer and the receiving master trust being advised that the transfer is in the member’s best interest. Once the concord is in place, the pots can be marched across the bridge – in bulk. This is a much easier process than individual transfer which is subject to delays from red and amber flags. Bulk transfers are in everyone’s interest.
There are however difficulties. Firstly, especially for mature GPPs where the employer has high turnover, much of the “value” is with deferred members who may have the pension terms from their employment , but have no further link. Some insurers count these “deferred” as members of the employer’s scheme and some move them into an orphan pool. These are not accessible to the employer or to the master trust unless the ceding insurer offers them up. Why should it?
So deferred members are sometimes in danger of being treated differently from active members and this is against the spirit of the active member discount legislation. To my mind, they should be offered membership of the master trust – if they can be found and if the rule of the mastertrust allow.
Secondly, the decision to move from GPP to master trust is not always a “no-brainer”. Many GPPs were written on highly competitive terms which may not be available even in the uber- price-sensitive world of master trusts. Price can be a poison pill and if a GPP persists with low-cost default funds (rather than more expensive diversified alternatives) then the price comparison works against transfer.
The defensive position of a GPP may be based on a price advantage that may beggar the neighbour.
Price and inaccessibility are the two biggest challenges to consolidators and though bulk transfers make it easier to transfer those savers who are actively at work, until transfers can be waved through on value for money rather than purely on price, many GPP members may find their old pot stranded.
The sooner we can get away from price as the determinant of value, the easier it will be to consolidate GPPs but for the moment we must recognise that many GPPs cannot move to master trusts because of the pre-eminence of price and because most of the value of the GPP to the master trust is inaccessible (being with deferred members).
It is therefore important that we recognise that GPPs are here to stay for many large employers, victims of the negotiating success of procurement teams pre and post the introduction of auto-enrolment in 2012.
But the advances in transfer technology (especially around bulk transfer) and the use of technology to allow members access to third party options (Sipps, annuities and scheme pensions) , means that GPPs can be upgraded by employers without the need to ditch the baby. More on this in future blogs.
Welcome back to work after the bank holiday.
