When New Labour came to power back in May 1997, the party memorably told Frank Field – the incoming Government’s first pensions minister – to ‘think the unthinkable’ as regards the future of pensions provision in the UK. Mr Field’s subsequent departure from the Government suggested that his plans were considered, on reflection, to be too unthinkable to ever be accepted.
However, the radical pensions overhaul that Frank Field sought to initiate has indeed led to the development of a new kind of pension. One that will be available to all those who wish to invest in it from 6 April onwards.
There has been a great deal of talk and hype about the new ‘stakeholder’ pension – in particular concerning what it actually has to offer for those individuals on so-called ‘medium earnings’ (between GB pound 10,000 and GB pound 20,000 per annum), and whether this pension can play the key role in the UK Government’s national planning for which it was devised.
Over the next few months we should start to find out precisely what impact stakeholder will have in the UK.
In trying to assess the likely effects of stakeholder, it’s first necessary to review the reasons for its introduction. Although the UK has a comparatively healthy record when it comes to private pensions provision – occupational pension schemes currently control some GB pound 600 billion worth of assets – the Government is still worried about the potentially draining effect on public finances of large numbers of individuals reaching retirement age who are solely dependent on the state for financial support.
In framing the new stakeholder pension, then, the Government set out to produce a form of long-term saving aimed at encouraging pension saving among those categories of people who may have disposable income with which to save, but who do not currently do so – either because presently-available schemes are perceived as being too ‘inflexible’ for their circumstances, they are too expensive or, as so often happens with company schemes, they restrict membership to employees who have been with a firm for a certain length of time.
Many companies have now scrapped traditional Final Salary Schemes altogether, restricting new recruits to money purchase plans based on ‘safe and sound’ speculation in stocks and shares.
Charges, advice and contributions
So what will the new stakeholder pension look like? In terms of charges, as in a personal pension the provider will be able to levy a charge in order to meet operational management costs. However, the charge levy will be restricted to a maximum level of 1% of the value of the member’s fund. This ‘cap’ has already been the subject of considerable dispute – many potential providers have argued that the low level of permissible charge will deter them from entering the market.
Either way, schemes will have to provide to a prospective investor basic information and explanatory material about the scheme. Specific advice can either be offered voluntarily or separately (for a fee).
This has been the most sensitive issue of all for the Government. The Labour Government was determined to restrict charges to what it saw as a ‘market acceptable’ level, and so decided that specific professional advice should be dealt with separately. However, strong representations were made to the effect that, if prospective investors had to pay separately for advice, they would simply decide not to seek it. The more pessimistic commentators have warned that this could lead to dissatisfaction and even ‘mis-selling’ allegations in the years to come.
The minimum contribution to a stakeholder pension cannot be more than GB pound 20 (although schemes may set a lower minimum contribution if they wish). Contributions can be made on a weekly or monthly basis, or at other intervals. Alternatively, contributions may be in the form of a single, one-off payment.
What about the tax implications? Well, the Government is to bring in a single, integrated tax regime for the stakeholder pension and other ‘defined contribution’ personal schemes. This will provide that contributions be made up to the higher limit of GB pound 3,600 per annum (including tax relief), and the relevant age/earnings-related personal pension limits – thereby allowing contributions of greater than GB pound 3,600 to be made if it would not be allowed under the existing rules.
The implications for employers
The stakeholder pension’s introduction will have direct implications for the many smaller security firms that employ more than four people (businesses with under five employees are exempted, but this situation will be reviewed within the next three years). Unless they qualify for special exemption, companies in this category will be required to ‘provide access to’ a stakeholder pension under the terms of the Welfare Reforms and Pensions Act 1999. Those who are not exempt must provide employees with a stakeholder option by no later than 8 October 2001.
Exemption applies chiefly to those employers who already offer access to an occupational scheme which staff can join within a year of starting work, and all those firms who offer a personal pension scheme in which the employer contributes at least 3% of the employee’s basic pay. The employer must also offer a payroll deduction facility to all scheme members, and ensure that the scheme imposes no penalties on those employees who either transfer out of the scheme, or stop making pension contributions.
‘Providing access’ means that the employer must nominate a particular stakeholder scheme which employees are then free to decide whether or not to join. This process is termed ‘designation’. Nomination must follow a period of ‘consultation’ with the workforce. There is no hard and fast rule as to what form this consultation should take, but it should be sufficient to allow those employees who will be eligible to join the stakeholder scheme to be informed about the employer’s provisional choice, and to allow them – ie the employees – to put forward their own views.
The Department of Social Security has specifically reminded employers that, during the consultation and nomination process, they are free to provide information to staff. They should not, however, purport to provide pensions advice to them.
It’s also important for employers to remember that all they need to do is to provide access to a scheme. There is no requirement (at the moment, anyway) for them to contribute. Where staff choose to join the nominated scheme, all employers have to do is to deduct contributions from the employees’ wages or salaries and pay them over to the scheme concerned.
The Occupational Pensions Regulatory Authority (OPRA) has indicated that wherever an employer does not provide access to a stakeholder scheme after October 2001, it’s not likely to impose penalties as long as the employer can show that it is indeed in the process of putting a plan in place.
Thereafter, OPRA will be prepared to penalise those employers who deliberately ignore their responsibilities – both in terms of nominating a scheme, and when it comes to paying over contributions from staff.
An alternative to AVCs
Although the stakeholder is designed to meet the savings needs of those on middle and lower incomes, many now think that it will prove most popular among higher earners – particularly as an alternative to the more traditional Additional Voluntary Contributions (AVCs).
With AVCs, the whole of the investor’s fund needs to be used to buy an annuity. Given the extremely low rates currently available, annuities are not that popular. With the stakeholder pension, anything up to a quarter of the final fund may be taken in the form of a tax-free lump sum withdrawal. This makes it an extremely attractive alternative.
Without doubt, recent years have seen a great deal of change in the field of pensions provision in the UK. Given the long-term implications of pensions in public policy terms, the Government is desperately hoping that its current plans in this area – including stakeholder – will prove a lasting and mutually satisfactory response to future needs. Only time will tell if we’re on the right track.
Managers and their security staff who would like further information about stakeholder pensions can telephone the Inland Revenue on its special ‘hotline’ number (08457 143143). Excellent advice is also available from the Pensions Info-Line (tel: 0845 731 3233), which is open from Monday to Friday (8.00 am through to 8.00 pm). Alternatively, write to DSS Pensions, Freepost BS5555/1, Bristol BS99 1BL.
Impartial advice on pension schemes is available on the Government’s dedicated Internet site (pension guide.gov.uk). This site contains a useful employers’ guide to the stakeholder pension, not to mention copies of those all-important application forms. Ignore it at your peril.
