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Give to take on stakeholder

The October 8 designation deadline was preceded by a lot of noise but not, apparently, by as much action as the Government or pension providers would have liked.

It appears that many stakeholder schemes have been designated but, according to figures from IFA Promotion, around 60 per cent of small to medium-sized enterprises still had no pension scheme in place when the deadline arrived.

Additionally, the limited amount of evidence available indicates that, of the employers which have designated schemes, only a small minority are prepared to make contributions.

Perhaps predictably, where employers are not prepared to make a contribution neither are employees. As a consequence, average contribution rates to designated schemes with no employer contribution are under 0.5 per cent of payroll – hardly what the Government was aiming for.

Off target?

One of the areas in which the stakeholder pension has found favour is among the so-called better-off or high-net-worth client base – something our experience at Charcol, both online and offline, bears out.

IFAs have not been slow to point out the financial planning opportunities to clients who have non-working spouses/ partners, children, grandchildren or indeed those who have retired but who have income to invest and are under 75.

The original target audience for stakeholder – those with earnings under £30,000 – does not yet seem to have begun to invest as much as was hoped. This is hardly surprising. For example, a couple with a combined income of £25,000, two children and perhaps a mortgage have little, if any, surplus income to invest.

Is this is what the Government intended, despite the change of emphasis placed on stakeholder by Alistair Darling about nine months ago?

Currently, Opra has 49 stakeholder providers listed. Most of them, at least superficially, profess to be actively seeking stakeholder business. Many claim they will or want to achieve a minimum 10 per cent market share.

It does not take a genius to work out that most of them are going to be disappointed – but which ones? The answer is relevant to financial advisers as they come to recommend specific stakeholder providers for their clients – whether individuals or employers.

The present situation can, in my view, be likened to a phony war. There is lots of propaganda from all the interested parties – whether the Government, special interest groups, product providers or intermediaries.

The Government wants the pension industry to go out and sell stakeholder pensions with the ultimate aim of reducing the burden on the state for the provision of income when people stop work.

Product providers are desperate to increase sales, having invested very significant sums in product design, in some cases (but not enough) in systems – and also in marketing.

The payback period, assuming that stakeholder business actually stays on the books, is on average 10 to 12 years before break-even is reached. When you reflect that no major piece of pension legislation has remained unaltered for more than nine years since the end of the Second World War, you could be forgiven for questioning the commercial logic.

A number of product providers have committed to stakeholder to such an extent that it is arguable that this may impact on other policyholders if the calculated gamble they have taken, in terms of securing a sufficient share of the market and achieving a certain minimum level of overall contributions, is not achieved.

This can hardly be what the Government intended when it set out its initial stakeholder strategy as long ago as 1996.

One of the platform speakers at the recent Labour Party conference suggested that life insurance companies should be bailing out Equitable Life.

This attitude suggests that there is a general belief in certain parts of the trade union movement – and perhaps the Government – that life insurance companies have bottomless pits of assets.

This might have seemed and indeed been the case a few years ago but with the triple whammy of lower interest rates, lower inflation and negative equity returns – exacerbated by the tragic events in the US – many life insurance companies now have much lower free-asset ratios. There are no large sums of money to keep on ploughing into stakeholder pensions and go on making losses.

If the current economic situation continues for any length of time we are likely to see a number of life insurance companies pulling out of the stakeholder market.

But there are still many questions that remain unanswered, particularly around the area of compulsion and the minimum income guarantee.

There is much debate about compulsion and whether the Government can be persuaded to make it compulsory and/or force employees to contribute to a stakeholder.

The Government knows that this could be construed as a form of taxation and is unlikely to want to be pushed into taking this action.

On top of this, the vexed issue of the minimum income guarantee and the degree to which the proposed pensions credit – due to be introduced in 2003 – will alleviate the position are also important factors. This will influence advisers in recommending stakeholder pensions compared with other forms of investment for people with modest incomes.

This leads to the equally vexed issue of advice and how and who pays for it. Many stakeholder providers are already digging into their reserves to fund advice as the levels of premium income, despite the operating efficiencies they have achieved, do not justify in some instances the commission being paid.

Is there a solution?

There is no easy answer but a good starting point would be for all the interested parties to get together and be honest about what they are seeking to achieve.

It would be helpful for product providers and intermediaries to know one way or the other whether compulsion is going to be introduced within, say, the next five years.

It would be equally helpful to know whether the Government is prepared to relax some of the conditions surrounding what constitutes the total 1 per cent charge so that perhaps some room can be made for the provision of advice.

This is a difficult one for the Government but if it wants to achieve its overall stated objective of getting more people to make their own provision for retirement, then there has to be some give on this point.

One further and major move forward for all concerned would be if the three main political parties would commit to the maintenance of what-ever revised legislation was put into place for a minimum 10 years.

Is all just this wishful thinking? Perhaps. But until somebody makes the first move the current uncertainty and generally unsatisfactory situation is likely to continue.

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