Are employers in serious danger of giving employees illegal advice on stakeholder as the FSA re-issues 1994 guidance?
Ritchie: In talks to local Chambers of Commerce and other employer groups, I have been warning about this for a couple of years. It is just common sense, if you think about it. When an employee asks the employer “do you think this is a good thing for me to do?”, if the employer says either yes or no, he has fallen into the trap.
The only safe answer is to say “you should take financial advice”. Of course, if the employer can add “and I will fix this up for you with an IFA”, this is the ideal outcome.
Naismith: The support of employers is absolutely vital if stakeholder is to reach the mass market. The confusion over the limits on their involvement could lead some to ignore the designation requirement completely and others to do the bare minimum. The most common scenario, though, may be that employers will unwittingly breach the advice rules. We need urgent and definitive guidance for employers and advisers on this.
Stammers: In regulatory terms, we have a structure which is fully advised at one end of the scale and execution-only at the other.
An employer actively promoting his scheme – be it GPP or stakeholder – currently risks crossing that line. While the obvious risk is one of giving unqualified advice, there is also the hidden risk – if the employer is deterred from promoting the scheme at all, fewer employees will join.
A fresh look at the issue by the FSA would be most opportune. In the meantime, there is one sure-fire way an employer can promote the scheme and be certain of staying legal – contribute to it!
What can be done to deal with the £27bn pensions shortfall revealed by the ABI?
Ritchie: The Government is putting in place some of the building blocks towards an annual single statement which will include all pension expectations, so that you can see whether you are roughly on track for a comfortable old age.
Pilot schemes are already in operation combining curr-ent private pension with state pension benefits on the annual statement. In 2003, there will be annual projections for money purchase on a “real terms” basis, which I expect will be a wake-up call for people who think they have sorted their pension by paying in £100 a month.
There is a growing belief that the Government will also introduce carrots and sticks for employers to chip in as well. Of course, if the Government reversed the abolition of dividend tax relief, that would go a long way to remove the shortfall.
Naismith: Almost everyone I speak to – providers, adv- isers and commentators – agrees that the shortfall can be seriously tackled only by introducing further compulsion in pensions. We already have some compulsion through Serps (soon to bec-ome the State second pension) and contracted-out alternatives.
However, this is currently not enough to provide good living standards in retirement and it needs to be extended. Australia is widely recognised as a country where compulsion has helped and a similar app-roach of gradually inc-reas-ing compulsory contributions could work in the UK.
Stammers: There are two strands to this – getting people who are not currently saving to start and getting those who have started to save more. Establishing an awareness of the need to save is the biggest challenge, particularly for those where money is tight.
This is already being tackled on a number of fronts – long-term education and making pensions simpler and better value.
For the very low-paid, the proposed Savings Gateway/-child trust funds are intended to incentivise a first step on to the savings ladder. The industry has a big role to play in promoting the need to save and the need for regular review to keep savings realistic. Initiatives like combined State/private pension statements will be instrumental in achieving this.
How far will markets have to rally to help meet the current shortfall?
Ritchie: The irony is that the further markets fall, the better value you get for the contributions you are investing. The sting is for those disinvesting in the same depressed markets. Nobody can accurately predict how markets will move while you are investing or disinvesting.
The moral must surely be to have a disciplined approach to contributions, a risksensitive approach as retirement approaches(with life-styling as the default) and keep the funding target under regular review.
Naismith: Recovery of markets to their levels at the end of 1999, and smarter investment by consumers, would undoubtedly help reduce the gap. However, the real issue is that people are not saving enough and it is unlikely that will be resolved without compulsion.
Stammers: It is tempting to suggest that if markets are down by 20 per cent, then that is what they need to rally by to restore the status quo. But that would be too simplistic – a shortfall existed before this year's market gyrations. What is now needed is for the market to stabilise – the current volatility is putting off many consumers. The real answer to the shortfall though is instilling in consumers the need to save and to recognise that their retirement could last almost as long as their working lives.
Is there a need for amending regulations on stakeholder?
Ritchie: I think there are some practical issues which need to be resolved quickly (for example, the exact role of the “reporting accountant”). Whether this needs change to regulations or simply clarification remains to be seen. Beyond that, I think we should wait until we have at least a year's practical experience before deciding on any chan-ges to regulations.
Naismith: Despite two existing sets of amending regulations, which were generally positive, there are a number of ragged edges that need tidied up. These include some grey areas around the definition of the 1 per cent charge. Crucially, too, protections for employers – particularly where they provide stakeholder acc-ess for “non-relevant” employees – need to be tightened up. A third set of amendments looks inev itable.
Stammers: Yes. There are some loose ends remaining. For example, a tightening up of the exemptions to avoid abuse, death-in-service only schemes and the like. Further clarity is also needed around what charges and expenses fall within or outside the 1 per cent cap – interpretation still varies across the industry. It could also be a second chance to look at with-profits.
Changing the regulations so that the cost of guarantees fell outside the cap would allow providers to offer true with-profits funds. These remain very appropriate for many stakeholder members, especially now that some of the original concerns about transparency are being addressed separately by industry and FSA initiatives.
What can the industry hope to achieve from Pickering's pension review?
Ritchie: I hope the Pickering review will be bold and also dovetail with the Inland Revenue's own simplification rev-iew. There is a rare opportunity to remove traps and make pensions more understandable.
Naismith: There has been evidence recently, for example, in the concurrency rules for the new personal pension regime, that the Inland Revenue is willing to listen to constructive suggestions from the industry. This gives hope that Pickering could produce something really positive but only if we can set aside our vested interests and agree some constructive proposals. Complexities normally arise either because the Inland Revenue wants safeguards to prevent tax avoidance or because the industry insists that everyone must be no worse off after any changes. Some flexibility on both sides is needed to achieve real simplification.
Stammers: The prize is less complication, encouraging more employers to get inv-olved and making pensions easier to understand by all. This translates to more people saving and less distribution and processing cost-essential if the 1 per cent world is to be sustainable.
The review goes hand in hand with the need to simplify tax regulation – we have seen the overhaul of the DC regime and work is now under way on the DB regime. The important thing in all these reviews is the even-handed treatment of all pensions types – simplification for one product type and not another could only serve to confuse rather than simplify.
Are you disappointed in the final outcome of Myners?
Ritchie: I am delighted that the Government is propos – ing to exempt insured schemes from Myners and that it recognises that non-insured small schemes should have discretion to decide that some of Myners is impractical for them. The potential sting in the tail for insured schemes is that they will instead be covered by the Sandler Review and nobody yet knows whether that will be onerous or not.
Naismith: Myners was alw-ays going to be a difficult balancing act between improving governance of occupational schemes and keeping costs at an acceptable level. It is certainly arguable that some of the principles are over-bureaucratic but on the whole the Government appears to have listened to the industry's concerns. In particular, the exemption for insure schemes is very welcome although we have yet to see how they may be affected by Sandler.
Stammers: Myners has tur-ned out to be something of a curate's egg. It is right that the investment principles should be guidelines and not too prescriptive in recognition of the fact that no two schemes are the same. The risk is that they may need to become prescriptive if the industry fails to adopt them voluntarily – they are probably too generic to be legally enforceable as they stand. The decision to replace MFR was long overdue and the interim relaxations proposed will give much needed respite.
Which leaves the issue of transaction services and questions so obviously loaded it makes “did you beat your wife last night?” seem neutral. Surely the key question for trustees is “what value is added for the management fees we pay?” Homing in on one aspect of the fund managers transaction costs will not tell them that.
Ian Naismith, Manager (pensions strategy)Scottish Widows
Nigel Stammers, pensions strategy manager, Clerical Medical
Stewart Ritchie, pensions development director Scottish Equitable