We are going to be so busy over the next six months registering stakeholder schemes, fine-tuning administration systems, briefing employers and getting ready to sign up the first customers, we will hardly have time to look further ahead.
So, before we begin the final lap of preparations, perhaps it is worth lifting our eyes to the horizon and looking to what the future might hold for us after the frenzy of the stakeholder launch has died down.
This calls for some scenario planning and the first step in any such exercise is to check our understanding of just what are the current drivers in the marketplace.
The long-term influences, such as demographic pressures and falling interest rates, are well documented. But it is not long-term influences that drive current developments.
Stakeholder is the child of a political situation and, while politicians may like to talk about the long term, Parliaments last for five years or usually somewhat less. There are more immediate forces at work here.
First, the electorate has an open dislike of taxation. We see this manifested not only at the gates of oil refineries but in the fact that both the main political parties now proudly include tax-cutting plans in their agendas. Lower taxes mean less money for state pensions.
Second, we have witnessed a major shift in employment trends. New jobs have been created in small firms competing more aggressively at the margins for business. This has led these employers to cut back on fringe benefits such as pension provision. Lower employer contributions mean individuals must save more themselves.
To these two drivers for change we can add a catalyst – media influence. The public are better informed than before so there is little danger of the first two drivers passing unnoticed.
Against this background, let us consider three scenarios.
Scenario one – stakeholder succeeds
The picture here is fairly clear. Employers are not only obeying the new laws on workplace access to pensions but are entering into the spirit of the thing warmly and encouraging staff to save for their future. Employees sign up in large numbers and the widely predicted reduction in the number of stakeholder providers takes place in an orderly fashion without consumers getting hurt.
But what is required for this to happen? Philosophically, stakeholder is part of the New Left's Third Way – a concept that seeks a balance between citizens' rights and responsibilities. Stakeholder pensions can only succeed in an environment where citizens accept they have a personal responsibility to provide for themselves and where that is reinforced with peer group pressure that it is good to belong to a stakeholder pension.
This needs people to talk about pensions rather in the way they do in the US. Watching the imported soap operas on British TV reveals 401(k) is a phrase that crops up in the conversation of everyday American folk. Sadly, most Brits are just not equipped to hold a conversation about pensions.
The scenario where stakeholder succeeds will need us to engage our customers more deeply in their pensions, with better communications, access to real-time information and telephone or online facilities to enquire into, inspect, alter and update their pensions. Then they can go out in the evening and say: “Guess what I did with my pension plan this afternoon…”
The rest of the scenario follows naturally. As employees show a greater personal interest in pensions, employers are more likely to include pension contributions in their remuneration package. Thus, as more stakeholders are sold, so providers achieve the necessary economies of scale.
Scenario two – compulsion
After careful debate, the pension Green Paper rejected compulsion. For all the philosophical arguments as to why compulsion would or would not work, I believe the turning point was the evidence from New Zealand where, in a referendum held over the introduction of a new system of compulsory pensions, the vote was an overwhelming 93 per cent against. Compulsion was similarly rejected over here because it would have been a vote-loser.
Compulsion will not come about if the first attempt at stakeholder fails. It is an even bigger vote-loser to make people do something they have just turned down when it was optional.
Rather, compulsion will come only after stakeholder has been largely successful, but with a few free-riders still relying wholly on state handouts. Then the majority will vote for laws that will make the minority follow suit.
Compulsion will bring great opportunity to the pension industry but at some cost. First, we get 100 per cent take-up in employer-based stakeholder schemes – apparently a bonanza for the incumbent scheme managers.
We also get a major rebroking exercise. With employers choosing the stakeholder pension provider into which their staff are compelled to contribute, bosses will be even more worried than they are now about the daunting responsibility that exercising this choice of provider entails and there will be a flight to quality. The best stakeholder pension providers, however that comes to be defined, will scoop the market.
All these contributions will come at a price for stakeholder providers. In a scenario where a Government compels people to save, it will want to strike an even tougher bargain than the one it already has with minimum standards and the 1 per cent expense cap will be brought even further down.
Scenario three – stakeholder flops
This picture is not pleasant but easy to portray. It starts with employers discharging their new statutory duties for workplace pension access but at the same time pouring cold water on the notion that any of their staff might actually want to take it up.
It continues with pensions remaining complicated and the need for detailed financ-ial advice remaining but pension charges being too low to provide it.
While individuals may be beginning to get the message that saving for retirement would be a good thing, other competing calls on the domestic purse take priority – to use a golfing analogy, pension contributions do not make the cut.
If stakeholder flops, private pensions become the pre-serve of the wealthy – the ones we might today call the private healthcare brigade. Employers continue to withdraw from pension provis-ion, except perhaps for top managers on salary-sacrifice schemes.
The majority of people come to rely on state pensions and these are increased by successive Governments seek-ing to attract an increasingly numerous grey vote.
We undertake scenario planning for two reasons. One is to help identify business strategies that can generate profits in any of the possible scenarios, so we do not gamble the future of our business on one particular outcome.
The other reason is to identify which future scenario will be best for us and our customers,and then to use our influence to guide the world in that direction. I have no doubt that the first scenario – the success of stakeholder pensions – is the best. I also believe many of the readers of this article have the necessary influence and competenceto bring it about.