GPP provider list will raise standards, trustees say

Aviva’s Company Pension was announced last week as the first GPP to meet the regulator’s entry criteria. In a statement the regulator said that smaller employers especially would benefit from the GPP model ahead of auto-enrolment compliance deadlines.

While greater GPP market regulation is welcome, according to pension trustees, some have questioned whether they do possess all the advantages the regulator propounds.

Not necessarily a natural alternative

Richard Butcher, managing director at professional trustee company PTL, said that smaller employers with no prior experience of pension provision would be more likely to go contract-based ahead of auto-enrolment deadlines.

“Many providers will supply auto-enrolment compliance guidance,” he said, adding that this would make the process less labour-intensive and more straightforward for smaller employers.

However, he pointed out that as GPPs are not subsidised by the government, they are “not necessarily a natural alternative” even for small and micro employers and have significant drawbacks.

In the trust-based model, trustees as well as members can move money, whereas in GPPs only members can, and it might be difficult to motivate individuals to switch from an underperforming provider. In a trust-based scheme, a trustee could take this action for them.

Moreover, unlike trustee boards, which can implement changes, independent governance committees can only make recommendations, potentially leaving employees exposed, he said.

However, Butcher conceded that GPP governance standards are improving, as the regulator’s list of entrance criteria show the gap is narrowing between trust and contract-based models, he said.

Wrong direction of movement

Chris Roberts, trustee representative at professional trustee company Dalriada, said that the looser governance and lower costs which attract employers to GPPs might ultimately disadvantage the model.

Because of the regulator’s current “direction of movement” towards tighter regulations and its emphasis on good governance, GPPs could lose out, as laxer controls might increase liabilities, Roberts said.

He predicted that the regulator’s list will raise standards in a highly competitive GPP market. Many providers will not have “the critical mass to survive” in the long term unless they also have solid endorsement from a regulatory body, he said.

Roberts noted that among employees switched to the GPP model, there might be “an element of concern about their employer playing a less paternalistic role” than it would have in a mastertrust. Ultimately, though, members’ confidence will depend on the quality of the provider and the covenant involved, he added.

Governance-lite no longer favourable

Alan Pickering, chair of professional trustee company Bestrustees, said that although GPPs were originally marketed “as a ‘low’ or ‘no’ governance alternative to trust-based schemes... nowadays, no one would suggest that members of defined contribution pension arrangements would benefit from governance-lite schemes”.

He continued that if GPPs are becoming more popular, this is not to do with loose governance, as IGCs will ensure that members “have a framework to protect them against the asymmetry of knowledge… within the financial services sector between supplier and customer”.

While he said that employers should have a range of choices, he emphasised that both trust-based and contract-based arrangements should be subject to the highest possible level of governance.

On the regulator’s provider list, Pickering said: “With every list like that, you have to ask yourself: why is the company I am dealing with not on an approved list?” He said the list will make employers think more carefully about their choice of provider.

He added: “Given what I do for a living, I would be very disappointed if someone made a switch to GPP to avoid tighter governance”.