With job security becoming a thing of the past, make way for the portable pension pot
Patrick Collinson looks at Peter Lilley's idea for the pension plan of the future
Saturday 24 February 1996
Mr Lilley's touted solution is group personal pensions, which the Government now hails as the pensions answer for the 1990ss Though sold as the answer for people who hop between jobs, are they just another way for companies to cut costs and leave employees without a decent pension? GPPs are pensions offered by an employer but which belong to employees, who, ideally, can carry their "retirement pots" with them as they switch jobs.
Peter Lilley's speech marks an attempt to put GPPs firmly at the top of the pension agenda. But in the wake of the pounds 3bn personal pensions misselling scandal, are they the way forward for you?
Employers have a range of options when deciding what pensions to offer. In final salary schemes - the 'Rolls-Royce' of pension schemes - your pension depends on your pay at, or near, retirement.
With group money purchase schemes, sometimes known as 'defined contribution' plans - both employees and employers pay contributions, but your pension depends on how well the invested contributions grow and how much the investment will buy at retirement.
These have soared in popularity among employers, as they take away the risk that the employer will have to make up any shortfall if the pension investments do not grow rapidly enough. But they cannot offer a guaranteed pension of two-thirds of your retiring salary in the way that the best final salary schemes can.
Both these are generally too complex and expensive for small companies and are not suited to the new world of job mobility. If you leave your job, you will need to obtain a value of your pension on that date, then either transfer it to another scheme or leave it with your former employer and waituntil retirement for payment.
David Dunn, head of product marketing at pension specialist NPI says: "Many companies stick with their final-salary schemes in the belief that it is better for their employees, but is that necessarily the case? Changes in employment patterns mean that very few of us will stay with one company throughout our career.
"I suspect that the future is with group personal pension schemes. From an employee's perspective, it is about ownership and control - it is their pension plan and not the employer's."
Fans of GPPs say that not only are they a simple and portable answer to job mobility but that they also enable a small company to at least offer some sort of pension where none previously existed. In doing so they also give small employers an extra tool to attract and retain key staff.
Yet the opponents of GPPs are numerous, and many fear a new wave of mis- selling matching the individual personal pension mis-selling scandal. Chief among their concerns is whether an employer will use a GPP as an excuse to cut the costs of pension provision.
Typically final salary and money purchase schemes offer a contribution from employers of at least 5 per cent of salary, with a similar amount put in by the employer. Anyone offered a GPP should check that their employer is putting money into the scheme, and at a decent rate. A 2 per cent contribution makes a GPP a very poor relation of final salary schemes.
GPPs also place investment choices firmly in the hands of the individual. Employers setting up a GPP usually use an independent adviser, but the level of advice and service to the employee varies sharply according to the fee the employer pays. Penny-pinching companies may be tempted to go for a cut-price option that leaves employees without sufficient advice.
GPPs have a role to play for smaller companies and for skilled workers and professionals happy to hop between job contracts. Longer-term employees barred entry to a final salary scheme and offered a GPP instead may find that rather than taking control over their pension they have added yet another layer of insecurity to their lifestyle.
But for millions of others, whose employers have been unwilling to make any contribution towards their retirement, a GPP may seem ideal. As long as they can persuade their boss to set one up in the first place.
Patrick Collinson is editor of Money Marketing, a weekly newspaper for independent financial advisers.
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