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GPP dilemma for pension providers

Product providers will either pull out of the group pension market or increase their charges in the run-up to the introduction of a national pension savings scheme, experts are warning.

Standard Life head of pensions policy John Lawson says it would be “financial suicide” for firms to establish up-front commission-based, low-charging GPP contracts now, less than six years before the scheduled implementation of the NPSS in 2012.

He says that many of these contracts will only become profitable for the provider after 13-14 years.

Using an example of a company paying 35 cent commission to an adviser on each scheme member’s annual premium of 2,000, he calculates that if the firm has an annual charge of 1 per cent per cent, it would take nine years to get the commission back and four to five further years to pay off the admin costs and reach profitability.

Lawson says: “It is clearly uneconomic to set up GPPs now on the basis that they will start to make money in year 14. Schemes offered on this basis will dry up.”

Winterthur pensions strategy manager Mike Morrison claims that providers will pull out of the market if demand declines. He believes that people will inevitably move to an inferior low-charge NPSS scheme.

Morrison predicts that providers wanting to remain in the GPP market will int-roduce set-up charges to recoup costs more quickly.

But Legal & General pensions strategy director Adrian Boulding says companies will only pull out of the market if they do not believe they can provide a superior product than the NPSS.

But Boulding says: “We are fully committed to the group personal pension market. Our view is that we are selling a raspberry ripple product compared with the NPSS plain vanilla product. If the product is visibly superior to the NPSS, the demand will be there.”


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