Surprisingly, active member discount (AMD) charging structures are sometimes portrayed as an undesirable addition to the GPP market. This is unfortunate, because the development of AMD remains one of the few genuine customer-led innovations to GPP charging, introducing choice and benefits to employers and employees.
Prior to 2007, the only real charge option available to employers was a flat annual fund charge mainly due to the effect on the market of the introduction of a stakeholder pension charge cap in 2001. GPP scheme charges usually depend on factors such as age, contributions and turnover of members. So, there was very little flexibility in the charge available to an employer with competition between providers being the only way to secure a lower charge.
Employers often have a target charge for their scheme. AMD’s introduction to the market gave employers an option to access a lower charge for active employees than they could have previously achieved. For example, before AMD, an employer may only have had the option of a 0.7% flat charge. But in today’s market he can now also choose an AMD charge of, say, 0.5% for active members and 1.0% for leavers.
AMD structures are designed to offer more choice to the GPP market. Enabling active scheme members to benefit from a lower charge is popular with both employers and employees. To reflect this customer demand, AMD is now commonly offered in the market Department for Work and Pensions research in 2010 identified seven providers offering AMD. Aviva offers both AMD and non-AMD GPP schemes, which allows employers to choose the structure that best fits their needs.
So, why is the introduction of increased choice through AMD not universally welcomed? It’s possibly due to a misunderstanding of how AMD works in practice, which could perhaps be better communicated by those that offer it.
One criticism often levelled at AMD is that it’s a way of penalising leavers to enable increased commission and/or provider profit. This is not the case (at least at Aviva). It’s not about increasing commission or profit. AMD is used just as much in the fee-based market as it is in the commission market. And (Aviva’s) expected profit for AMD and flat-charging options is broadly the same.
An AMD structure presents no barrier to exit. Also, just because employees leave a GPP with AMD, it doesn’t necessarily mean they’re in a poor value proposition most of the time, the leaver charge compares well with a charge that a leaver could secure from an individual pension product. To underline this, the DWP research showed that across seven providers, the average levels seen for active compared to deferred charge are 0.6 per cent and one per cent respectively. And, many propositions maintain the discounted charge for leavers as long as they make regular payments above a certain level (with Aviva’s proposition it’s just £20 a month), which is popular with both employers and employees.
It is important that AMD propositions are built with features that take account of how the charge structure may affect customers. One requirement is to clearly disclose the effect of the charge structure both at the point of sale and when employees leave the scheme. Customers can also be protected by restricting the maximum leaver charge for a GPP scheme and limiting the differential between the active and leaver charge.
The development of AMD has genuinely enhanced the GPP market, although it does need to be communicated and built in a way to protect customers. Hopefully it can also serve as an example of good product innovation to help spur further developments to meet the needs of the rapidly changing pensions market.
Steve Jackson
Group Pensions Marketing Manager
Aviva