Stakeholder pensions. What a crazy world. At present, the Government has every right to be confused about the latest noises emerging from the industry.
On one hand, there is talk of low take-up rates while on the other, companies are withdrawing from the market bec-ause of too much business. Renewed calls for compulsion from some quarters for stakeholder to succeed are set against more employer-sponsored pension planning than we have ever known.
In practical terms, the 390,000 or so employers covered by the legislation have had a couple of years notice that they were going to have to review their pension arrangements. Many of the more responsible employers have done this in good time and there has already been a significant expansion of pension coverage among employees.
This stakeholder effect is much wider than simply the number of people joining a stakeholder pension scheme.
Many occupational pensions have had their eligibility conditions widened to admit employees who would otherwise have been excluded on grounds of being, for example, too young or too new to the company.
The ABI is carrying out a major tracking study to collect and publish data on the stakeholder effect. This is in addition to its existing work that has already demonstrated the growth in group personal pensions since the stakeholder details became known. Using 1998 as an index base of 100, new GPP business on the standard industry measure was 115 in 1999, 157 in 2000 and 230 on an annualised basis for the first quarter of 2001.
Admittedly, some of this represents switches from other types of pension provision.
The impact of the stakeholder effect can also be seen in the group risk market. As employers have reviewed their pension provision, many have taken the opportunity to review their overall employee benefits packages, including death and sickness cover. Providers are seeing a surge in demand for protection products. This has sparked new entrants and importantly for the customer more choice. The setting of the charge cap at 1 per cent has been fiercely debated. But it is now with us.
There are three issues here. First, will the stakeholder take-up be lower because of the charge? Second, can providers afford to play in the stakeholder market? Third, can advice be obtained? Unfortunately, the answer to the first part is yes. Good pension planning should not be restrained by cost. Cost is a factor but among several big and complex issues. This is not a simple supply and demand equation.
Can providers afford to compete? Well, profit margins have fallen in the pension sector to levels which put an emphasis on volumes of business and the cost of delivery. For the bigger players who have invested well in technology, unit costs are falling faster than gross margins. Full end-to-end processing of big pension schemes can now be achieved in minutes rather than weeks and comes with associated reductions in the expense base. Many pro-viders, unless they have this capability and capital adequacy, will be unable to remain at the stakeholder table.
With regard to the last part, pensions have never had so much publicity and never been as high on the political agenda. It is also, along with mortgage arrangements, the most important long-term investment decision that individuals and employers can make. The earlier educated planning takes place the better. A fuller development of the advice process must be supported.
And this is the crux. Stakeholder is starting to achieve a lot of the objectives that it promised. But not all. The very best ideas often need to be nurtured and developed from their beg-innings and this is a classic example. It is not the final answer but it is getting there. Stakeholder is more beauty than the beast.
Peter Dornan is director of group businesses at Aegon UK