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Cherry blossom

There are growing fears that the introduction of stakeholder in April next year will not become the universal savings plan for all working members of society the Government promised.

IFAs and providers fear new measures to be introduced by the Department of Social Security will give the green light to cherry-picking of stakeholder business and lead to the neglect of the low-earning target group.

Proposed technical changes could further reduce the attractiveness to pension providers of offering stakeholder schemes to individuals and lower earners.

When the idea of stakeholder was introduced, the Government intended that it would encourage all workers, irrespective of their income, to save for their retirement without it becoming compulsory. Cat standards were also introduced to make sure costs in particular are kept to a minimum, with a maximum annual management charge of 1 per cent.

However, many pension pro viders feel that they may not be able to offer a competitive product within this low annual charge linked to the low minimum premium of £163;20 a month.

One way the providers could make sure they do not lose money is to restrict membership to employees who can afford to invest more each month.

Scottish Widows pensions strategy man ager Ian Naismith says: “Providers would want to look for reasonably high-net-worth earners. They would hope that, in practice, their advertising and marketing campaigns will attract higher contributions.”

To make sure pension pro viders and employers do not restrict membership, the Government has decreed that no schemes will be permitted to restrict membership by reference to the financial status of a potential member nor the amount of contributions to be made.

But this rule will not prevent schemes from restricting membership to stakeholder pensions by reference to employment with a particular emp loyer or in a particular trade or prof ession or by reference to membership of a particular organisation.

The basic position at present is that stakeholder schemes established under trust – similar to the occupational scheme model – allow members of particular employment groups to be exc luded. At the moment, the rules do not allow any other types of scheme, such as contract schemes, to allow restrictions to membership in the same way.

The latest proposed rules from the DSS extend this rule to include both trust-based schemes and those run by an authorised scheme manager.

A DSS letter says: “The original reason for the restrictions was to limit the scope for cherry-picking of members and to ensure that schemes would be available to all those in the main target group for stakeholder pensions. This change will, therefore, be subject to review after three years to consider whether a significant problem of cherry-picking has emerged.”

But not everybody thinks cherry-picking will occur. Autif senior policy adviser Alison Michell feels that affinity groups may lead to greater membership of stakeholder because these groups are unlikely to discriminate between its members.

She says: “The DSS has said it was concerned as cherry-picking would lead to providers targeting higher earners. But that is not what affinity groups are about. For example, the TUC is setting up an affinity group for members without limiting membership.”

However, Axa Sun Life senior technical manager Tony Tollerton believes that affinity groups could improve the benefits of their schemes if they cherrypick the potential members.

He says: “Affinity groups are set up for a set group of people. They could put in restrictions if they wanted as to who can join to try to get better terms. Clearly, for trades where the aver age earnings are higher, providers expect higher contributions. But we are not expecting major stakeholder schemes to offer any restrictions. Some stakeholder providers also feel that the rules will not lead to greater discrimination among lower-paid workers or those wanting to pay smaller contributions. Tollerton says there are still limits as to the amount of cherry-picking that can be carried out.

“The original concern is that providers would have gone for higher contributions but the revised rules still prevent companies following this route,” he says.

Naismith hopes people will not cherry-pick who is permitted to join stakeholder schemes but he does not believe the rule change will alter anything. He says: “I do not know why the DSS has made the change. Stakeholder is available to everybody.”

Some IFAs believe providers will find it difficult to make a profit from stakeholder.

Informed Choice managing director Nick Bamford feels there is a straight choice – making profits or keeping costs down.

He says: “Leaving aside the moral issues, I reckon pensions companies will want the former. Why should we expect companies to squeeze themselves further to where it is impossible for them to make a profit?”

Despite this, Bamford does think there will be an element of cross-subsidy. He says: “The companies will take on some non-profitable business to make sure they get some business that is profitable.”

Charles Mullins, a partner at independent pension consultant The Pensions Partnership, believes the maximum 1 per cent annual charge is no incentive to providers not to cherrypick and could lead to a meltdown of stakeholder. “If you take on the idea of cherry-picking, where only certain people are considered, the whole concept of opening up pensions to everybody is defeated,” he says.

Bamford believes individuals who have no access to group stakeholder schemes will lose out. He says: “Individuals will find it tough to buy into stakeholder schemes with an annual charge of 1 per cent. It is easy to see why the providers are more interested in group business. Most are very reluctant to offer individual products.”

However, the ABI believes that making a profit from stakeholder may not cause providers too many problems. A spokesman says: “Insurers are looking very closely at the pros and cons of offering stakeholder pensions. We do not envisage any particular problems but some com panies may decide that stakeholders are not for them.”


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