Author: Graeme Lobban & Marcus Paine

As a nation beleaguered with pension laws, pensions reviews, pension scandals, etc., etc., the New Labour government has been busy reviewing the provision of pensions in this country and have come up with another plan – the Stakeholder Pension.

Stakeholder Pensions will become available from the next tax year on April 6th 2001. They are the current Government’s answer to the criticism heaped on personal pensions over their 12-year history, i.e. that personal pensions are too expensive, provide poor transfer values in the early years, and are not as flexible as initially intended. Personal Pensions have become more competitive over recent years, however the government’s aim has been to provide a pension plan that is accessible to all - especially the “lost” pension population earning between £8,000 and £20,000 p.a. There are millions of the UK workforce who fall into this earnings bracket and have no current pension provision aside from the state basic pension.

The Government have introduced Stakeholder pensions as the next step on the road to self-sufficiency in pension planning and employers are earmarked to play a key role in their distribution.

What is a Stakeholder pension?
Stakeholder is intended to be a simple, low cost and flexible way to save for retirement. To be able to call itself a Stakeholder, a pension will have to meet minimum standards on cost, access and terms (called the CAT standard). Under Stakeholder rules, insurance companies must offer their plan with no initial charges, no early transfer or retirement penalties and a maximum annual management charge of 1%. Having squealed about the lack of profitability, the major players in the pensions market have now devised their Stakeholder plans within the set guidelines.

Employers like Pat Givan of Castle Interior Contracts Ltd will have to address the issue of Stakeholder pensions for their employees. Castle Interior Contracts is an office fitting business with clients such as Standard Life and Scottish Provident and was set up by Pat 3 years ago. The business now employs 14 people and Pat is very aware of the need to provide his employees with benefits in addition to salary, especially in the area of pensions.

Who will Stakeholder affect and when will it come into effect?
The Government has decreed that employers like Pat will be required to play a key role in making stakeholder work. Any company employing five or more people and that does not already have a pension scheme for its employees, such as Castle Interior Contracts, will have to choose a Stakeholder pension provider and must be able to deduct employee pension contributions from the payroll systems. The regulations come into force on April 6th 2001 and schemes must be in place within six months, i.e. by October 2001.

The Requirements:
Pat must give basic information about the chosen scheme to all of his employees and allow time for them to find out about Stakeholder. He will also be responsible for sending these pension contributions to the pension company that runs the chosen stakeholder scheme. Although the deadline is not until October 2001, many employers like Pat will need to start thinking now about how their business can meet these requirements.

For employers with existing pension schemes, access to a stakeholder pension will not be compulsory as long as all employees are allowed to join the existing pension scheme and, if it is a Group Personal Pension that qualifies for exemption. The employer must offer to contribute at least 3% of employees' earnings. This contribution can be made conditional on a matching contribution of up to 3% of basic salary from employees.

Other Factors:
The traditional pension “carrot” of tax relief on the contributions and tax-free growth of the accumulating pension remains. However, a major shift in emphasis is being introduced with Stakeholder in that individuals will not have to provide evidence of their earnings before paying into their Stakeholder plan as long as the contribution is under £300 p.m. or £3,600 p.a.

Stakeholder pension legislation is only now becoming law, so the full government public awareness campaign has yet to start. Many employers will therefore be unaware of these changing rules and will baulk at the additional cost of resources needed to manage these new pensions. However insurance companies and advisers are positioning themselves to offer low cost, efficient means of managing these new pension schemes – including direct access via insurers and advisers websites.

The government are hoping that many individuals will avoid the cost of advice on choosing the best stakeholder for them by the provision of “decision trees” in the insurers’ literature. However, to date, initial samples of these glorified flow charts would be hard pressed to win any Plain English awards. It is therefore expected that maybe more, rather then less, advice will be required.

In Summary
The legislation has stopped short of making employers’ contributions compulsory however a pension scheme for employees will no longer be an optional extra – so doing nothing is not an option for employers. Whether employers will be willing foot soldiers in the government’s war on adequate retirement provision remains to be seen. With trade unions and other associations being encouraged to provide stakeholder plans, it will be in employers’ interests to keep control of their employee benefits and help foster loyalty.

In the longer term, a major concern for stakeholder providers is the profitability of these schemes. The big insurers are therefore lining up to grab market share, because with the low profit margins involved, high volume business will be essential for long-term survival. Five or ten years from now, only a fraction of the initial providers will still be in this market.

Since every insurers’ basic stakeholder plan will be almost identical (give or take the odd .1% annual management charge) the insurers will have to compete over their investment track record, advertising budget and quality of administration. Although investment growth will dictate who gets the best pensions at retirement, it is the financial might of the stakeholder providers that will determine who is still in the marketplace 5 years hence. Judging by all previous pension arrangements the quality of administration is also likely to keep the Ombudsman busy in years to come!

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