The Government's proposal of a transparent, low-charging, easy to understand pension vehicle, namely stakeholder, would seem to fit the bill for encouraging people to save for their retirement.
Although the Government has consulted widely and at length on this, it has not been able to deliver the much hoped for simplification of pensions as a welcome by-product.
With April 6 looming on the horizon, a close inspection of the pension landscape rev eals further complication has been introduced that will ensure the phone lines of technical support functions will be busy in the coming months and beyond.
To illustrate this, consider the challenges that face IFAs on the introduction of stakeholder and the new defined-contribution regime. Additional considerations in the emp loyer-sponsored pension arrangement arena are of particular interest.
IFAs need to be clear on the distinction between schemes registered as stakeholder and schemes operating under the DC regime. The latter is a simplified tax regime open to defined-contribution schemes, which may or may not register as stakeholder schemes.
On the other hand, a def ined-contribution occupational scheme, which registers as a stakeholder scheme, can remain outside or opt in to the DC regime.
A defined-contribution occ upational pension scheme opting in to the DC regime will need to apply for fresh app roval from the PSO. Approval, if received, will be granted under Chapter IV, Part XIV, of ICTA 1988 and thereafter the scheme will be treated as a personal pension scheme for taxation purposes.
The DSS will continue to treat such schemes as occupational pension schemes as they use the definitions given in Section 1, Part I, of the Pension Schemes Act 1993 in determining scheme type, that is, occupational or personal pension.
This treatment ext ends to all trust-based schemes established by employers under the DC regime, although in determining the impact of specific social security/pensions legislation on an emp loyer-sponsored arrangement it is advisable to check the actual wording.
For example the Pensions Act 1995 refers to LPI applying to schemes approved under Chapter I, Part XIV, of ICTA 1988 and therefore this piece of legislation does not apply to occupational pension schemes opting into the DC regime.
To illustrate the comp lexity that will exist from April 6,let us consider the position before and after this date.
Currently, there are three options for employers wanting to offer pension provision for their employees – occupational defined benefit, occupational defined contribution or group personal pension. IFAs should be well versed in preparing the necessary comparisons for their corporate clients.
From April 6, these three options will still remain. However, further options will be available within occupational defined contribution and group personal pension as illustrated in the diagram above.
IFAs advising their corporate clients on the most suitable pension vehicle need to consider more than just the type of arrangement. Where the favoured arrangement is of the defined-contribution variety, either occupational or personal pension, then the positioning of the scheme within this diagram is a further factor for consideration.
In the case of personal pensions there are three alternatives – two, six and seven. The only significant difference between six and seven is in the area of governance (trus tees versus authorised stakeholder manager).
Option two is the non-stakeholder variety of personal pension and therefore differences exist in the areas of eligibility, changes to employee contribution levels, administration charges, auditing requirements and statement of investment principles.
Four alternatives are available for occupational defined contribution schemes – one, three, four and five. One and four will operate outside the DC regime and as such will be subject to the existing IR contribution and benefit limits and DSS requirements that currently apply to occupational pension schemes.
The DSS requirements that apply to one and four will also apply to three and five, alth ough three and five will reflect the contribution and benefit limits of the DC regime. Option five will differ from three due to the requirements of stakeholder.
The distinction between occupational defined-contribution schemes and personal pensions will be less clear cut.
This complexity would normally result in a lack of act ivity in employer-sponsored arr angements over the coming months. However, the impact of stakeholder will require action from some employers and discussions with their IFAs will focus on the options available together with an explanation of the implications of choosing a particular option.
There are numerous scenarios and it is worthwhile considering some possibilities.
Employers which are affec ted by the impact of stakeholder fall into two categories:
l Employers with existing pension arrangements, where action is required because of the eligibility criteria and/or charges associated with the arrangement.
l Employers that do not have a pension arrangement currently and do not meet the stakeholder exemption criteria.
For the first category, the solution would appear to be straightforward. Change the eligibility criteria and/or the charging structure to gain an exemption. However, if the changes were not possible to effect or the employer were unwilling to make the changes, then access to an employer designated stakeholder scheme must be offered.
Even with this situation,a choice exists as to the type of designated stakeholder scheme (trust or contract).
The choices available for employers in the second category are not as obvious. Discussions with their IFA will need to cover a wide range of issues. A good working know ledge of existing pension law and the DC regime and how they interact with stakeholder will be vital for IFAs.
The employer's requirements, other than the need to do something, will be the starting point for the discussions with the IFA. For example, the emp loyer's main requirement might be that they are not committed to making contributions, in which case, an occupational pension scheme oper ating outside the DC regime and an exempt GPPS can be excluded from the discussions (unless salary sacrifice was being considered).
Alternatively, if the emp loyer were happy to contribute to the pension scheme but wanted to exclude emp loyees until they have been in service for at least 12 mon ths, then consideration would be given to an exempt occupational scheme.
If a DC arrangement were the preferred occupational pension scheme, then the positioning of the scheme inside or outside the DC regime would become an issue.
It is not very likely that options four and six would occur in practice because,in the case of four, the disadvantages outweigh the advantages for an employer registering an OPS as a stakeholder.
In choosing the stake holder option, the scheme cannot impose exit charges, is likely to operate under a tighter char ging structure and have to apply less restrictive eligib ility conditions.
The employer also loses discretion over changes to employee contribution levels under payroll deduction. The only other difference involves scheme governance, member nominated trustees (non-stakeholder) versus independent trustees (stake holder).
The stakeholder regulations require that at least one trustee is independent of the scheme provider and the DSS has confirmed that the employer can fit this description.
As for option six, the Pensions Act 1995 and independent trustee requirements are likely to discourage financial institutions from offering this type of stakeholder, preferring the less restrictive stake holder manager option instead.
The Inland Revenue has introduced regulations that allow employers to establish a PP under trust.
A scheme of this type that does not register as a stakeholder will, in effect, be an OPS that opts into the DC regime (option three above).
While, in practice, we may discount options four and six, there are, in theory, seven alternative routes available for employers to take, come April 6. IFAs will have to be alert to all possibilities if they are to give best advice to employers.
The diagram here illustrates where employer-sponsored arrangements can be positioned in relation to stakeholder and the DC regime. These are the different types of arrangements numbered in the diagram.
An occupational pension scheme established by an employer under trust approved under Chapter I, Part XIV, of ICTA 1988 complying with the stakeholder exemption requirements.
A personal pension scheme established by a financial institution approved under Chapter IV, Part XIV, of ICTA 1988 complying with the stakeholder exemption requirements.
A defined-contribution occ upational pension scheme established by an employer under trust that opts into the DC regime and is approved under Chapter IV, Part XIV, of ICTA 1988.
An occupational pension scheme established by an emp loyer under trust that reg isters as a stakeholder scheme and is approved under, Chapter I, Part XIV, of ICTA 1988.
A trust based occupational pension scheme established by an employer under the DC regime, which registers as a stakeholder and is approved under Chapter IV, Part XIV, of ICTA 1988.
A trust-based personal pension scheme established by a financial institution, which registers as a stakeholder and is approved under Chapter IV, Part XIV, of ICTA 1988.
A stakeholder scheme which is run by a stakeholder manager and is approved under Chapter IV, Part XIV, of ICTA 1988. Stakeholder managers will be authorised by the FSA.