My current employer’s pension scheme is what’s called a Group Personal Pension scheme, or GPP for short. I’ve been a bit sceptical of the way these schemes operate for a while, but a recent letter has pushed me into blogging about them.
A GPP scheme is very simple. I join the scheme when I start work, and the company deducts a percentage of my salary every month and pays it into my pension. It also contributes a bit more on top – which is money I wouldn’t otherwise get paid if I didn’t participate in the pension scheme. Both payments are invested by the pension provider, and when I retire, I cash in the investments and take the money – either as a big pile of cash, or as a monthly income for life (an annuity) or a bit of both. Because saving for retirement is seen as a Good Thing, the government also offers a tax incentive: the money that gets paid in each month (both mine and my employers’ contributions) is paid in free of tax. The investments attract no tax whilst they remain in the pension scheme, and when I retire I can claim 25% of my resultant pot as tax-free cash, with the rest attracting income tax if it generates a big enough income.
Effectively, each employee’s pension is a completely separate account – which is why it’s called a “personal pension”. However, because the employer is bringing the pension company a large number of customers, the pension provider (usually a large City firm – mine is BlackRock) gives a discount on the fees based on the number of employees in the scheme. Fees? Yes, fees. Pension funds cost (some) money to operate, and this money is taken from your total invested funds in the form of an Annual Management Charge (AMC). If I go and buy a personal pension scheme from a high-street firm, the AMC will typically be 1% of the fund (for example, here’s Virgin Money’s personal pension). My current employer’s GPP scheme charges 0.6%, which you can see is a significant saving. I still have a GPP from my previous employer too, which was a larger company and charged 0.38% because it was able to negotiate a bigger discount.
Most GPP providers allow you to choose how you invest. This is often rather poorly presented and explained, and they frequently conceal the fact that different funds you might invest in attract different AMCs. For instance, my employer’s default fund charges 0.6%, but it’s possible to change to a fund that charges 0.4%. Whether the latter fund has better or worse performance is hard to say, but a reduction in AMC is potentially going to save you some money.
My firm’s scheme defaults to an actively-managed fund. This means that a specialist fund manager is choosing what the fund invests in and aiming to produce a good return for the investors. The alternative is a passively-managed fund (sometimes called a “tracker”) where the fund simply buys shares in every company in the index so that the fund “tracks” the value of the index overall. Passive funds are pretty much run automatically by computers, and hence are cheaper to manage as you’re not paying for the fund manager’s salary and overheads. The overwhelming evidence is that active management doesn’t actually convey any benefits (in the long term, it’s not usually possible for fund managers to “beat the market” by choosing shares) and so it’s actually less risky to choose the passive fund.
The letter I received this week is from my pension provider, saying that they are “very pleased to announce” that they are reducing the AMC on my pension funds. That’s very nice of them. Reading a bit further down, it becomes clear that the pensions advisors, a local firm called NW Brown, who my employers use to administer the pension scheme, have been being paid a commission out of the AMC, and that new government regulations have stopped this. This commission was 0.1%, so out of every thousand pounds in my fund, I was paying a pound to NW Brown every year!
I’m glad this has been regulated out, but it does bug me that the increasing popularity of GPP means that the pensions industry is now something of a stitch-up for the individual employee. In order to access the extra pension contributions my employer offers, I have to invest the money with their chosen pension provider. The pension providers restrict the funds that I can invest in to a shortlist of a few dozen, as against the hundreds that are available on the open market. They provide relatively skimpy information about how their funds work, and take a management fee – some of which until this year was commission paid back to the pensions advisors! I think this is quite anticompetitive: why can’t I take the money to any pension provider? Also, there’s no reason for the AMCs to be so high – there are passively-investing funds available on the open market charging less than 0.2%, but my pension provider doesn’t list them. I can’t help feeling that the whole thing is set up to provide a steady flow of clueless capital into the City firms, for them to do as they please!