It seems appropriate that the demise of the pension named after a Westminster buzzword coincided with the consigning to history of the political force that brought it about.
As the Labour conference learnt that the party is no longer ‘New’ but ‘One Nation’, the DWP quietly implemented legislation repealing the requirement for employers without a suitable alternative to provide access to a stakeholder pension. That was one of the flagship initiatives of the early years of Tony Blair’s government.
An obituary for stakeholder pensions may be premature but the combination of automatic enrolment and the RDR will lead to a rapid decline in sales.
So now may be a good time to assess the impact of stakeholder pensions and lessons for the future.
Stakeholder is the Robin Hood pension, taking from the rich and giving to the poor. The rich includes consistent savers, who largely remain blissfully unaware that their 1 per cent a year is heavily subsidising pension provision for the less thrifty. It also includes providers compelled by market forces (with a hefty regulatory shove from RU64) to sell tens of thousands of pensions below cost price and hope that customer persistency will make the exercise profitable.
The redistributive effect of stakeholder charges is enormous. It also accelerated an overall reduction in pension costs, helped by increased automation.
Market forces and regulatory intervention through the RDR have now pushed individual pensions in the opposite direction, with charges better aligned to the size and incidence of cost. Stakeholder pensions cannot adapt and will occupy a small niche in this new world.
Stakeholder also brought a requirement for almost all companies with at least five staff to offer pension provision, with or without employer contributions.
In practice, this led to thousands of empty shell schemes and many employers who simply ignored the legislation and possible sanctions. Flowfood might consider itself unfortunate at being singled out for a £10,000 fine in 2004, as other firms went unpunished.
By most measures the employer duty element of stakeholder pensions was not a great success, but there are lessons to be learnt. One is that if you offer a pension without any guidance or employer contributions most people will just ignore it. It remains to be seen whether automatic enrolment with employer contributions will massively increase pensions coverage, but there must be a reasonable prospect of that.
A second lesson is that hefty sanctions against errant employers are only effective if the regulator uses these sanctions. This becomes particularly important when there is real money involved, as there is with automatic enrolment, whereas stakeholder requirements at their most basic were just about access.
The challenge for The Pensions Regulator is how it deals with very large numbers of employers not following the rules, particularly now they apply even if there is only one employee. Its enforcement plan looks robust, but could be heavily tested.
I suspect that in 20 years’ time stakeholder will be an interesting footnote in pensions history, rather like Top Hat and S226 arrangements are now.
It revolutionised charges and was a staging-post on a road that may ultimately lead to compulsion, but NEST is the new kid on the block (other low-cost pensions are also available).
We must hope the new regime succeeds where stakeholder failed in bringing widespread pension coverage to the masses.
Ian Naismith is head of pensions market development at Scottish Widows