The Government's proposals to arrange pension provision for all has finally come to fruition. Stakeholder pension schemes came on stream from 6 April 2001, and must be made available to all employees who don't have access to an occupational pension scheme(with some exceptions: see 'Decision Tree', left) with effect from 8 October. The Government's intention was "to strike a reasonable balance between a modest additional burden on employers and the need to ensure wider access to good-value pension schemes" (Stephen Timms, Pensions Minister, 11 March 1999). How well has this balance been struck?
The origins of the stakeholder proposal was the Partnership in Pensions white paper published in 1998. For employees with earnings below £9,000 per annum, the solution proposed was a reform of the State Earnings Related Pension Scheme, and the introduction of a minimum income guarantee for all pensioners. Stakeholder pensions are aimed at those with earnings between £9,000 and £18,500 per annum: so-called "moderate earners" who could be expected to save something for their retirement.
What was needed was a reform of the personal pension system which has been around for many years. Stakeholder pensions should be secure: operated by trustees and not the pensions industry. They should be low-cost: a cap on charges would be put in place, made possible by reducing the administrative burden on the provider by advertising through the workplace. They should be flexible: there should be no penalty for changing jobs or taking a career break. They could not be final salary schemes however, and benefits would have to be defined in terms of the contributions paid, and not the earnings of the investor.
The requirement for a trustee board was an early sacrifice. Stakeholder pension schemes can be administered by a stakeholder manager, with proper accreditation from the Financial Services Authority. These schemes can have trustees, and some unions have created their own stakeholder schemes which do have a trustee board. The actual provider of the pension is inevitably one of the large insurance companies, but unions can negotiate for a proper trustee board or advisory committee, charged with selecting and overseeing the insurer. The TUC has set up its own trust based scheme available to affiliated unions.
The reduction in charges has been the big success story for stakeholder pensions. Charges must be kept below 1% of the sum invested, and there must be no exit charges for those who leave early. The bigger insurers have undercut each other even below this 1% cap, and applied the same charging structure to their other personal pension contracts.
More dramatically, non-earners are allowed to contribute to a pension for the first time: anyone under 75 years old will be able to pay up to £3,600 to a stakeholder scheme.
The tax arrangements are the same those for personal pensions except that the contributor does not need to have any taxable earnings. Those who are in employment can contribute the same amount. (Note that this limit includes employer contributions if any, and the tax rebate. If an employee has earnings over £30,000 per annum, they can only contribute to a stakeholder arrangement for five years. There is no need to contribute regularly, but the minimum contribution is £20.)
And the other side of the equation: what of "The modest additional burden on employers"? That is the big failing of stakeholder pensions: there is no compulsion on an employer to contribute. It must consult its employees and recognised trade unions before choosing a stakeholder scheme for its employees, and then point its employees in the direction of the selected provider. It must offer a payroll deduction facility, pass contributions on to the provider within specified time limits, and keep proper records.
But that is about it. Given that the employer does not need to contribute, that the scheme need not have trustees, and that the tax regime is the same, it is difficult to see a great difference between this and ordinary personal pensions with limited charges and a facility for non-earners to contribute.
There are two big risks in the new world of stakeholder schemes. The first is the damage they could do to good quality final salary pension schemes. The government has recognised this and emphasised that it sees occupational schemes as the best arrangement for pension provision. It hopes to avoid the personal pension mis-selling scandal repeating itself by allowing employees to contribute simultaneously to an occupational scheme and a stakeholder scheme (unlike personal pensions: the same contribution limits outlined above apply). There is no way of knowing at this stage, however, whether the availability of stakeholder pensions will encourage employers who are already thinking about it, to close final salary schemes and go for money purchase.
The second is the risk of giving and getting bad advice. The giving of advice is still carefully regulated, and the risk is to union officials: they risk committing a criminal offence if they give personal advice to members about the investment options available to them. General advice about the nature of stakeholder schemes and the attraction of occupational schemes is permissible, but if a member needs to know which choice to make, the only safe course is to point him or her in the direction of an independent financial adviser or the representative of the stakeholder scheme insurance company.