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Last chance for stakeholder

Down at the “Last Chance for Stakeholder” saloon the players are getting ready for one last throw of the dice.

All the talk is of compulsion – if the low earners will not contribute voluntarily then it is up to the Government to force them into stakeholder pensions. Achieve this and stakeholder suddenly starts to make sense.

Distribution and servicing costs will fall as the business volumes arising from compulsion will achieve significant servicing economies and sidestep the need to pay for distribution.

All of which should mean the stakeholder players would achieve the objectives they dreamed of when they drew up their stakeholder business plans.

So far so good – a perfect plan. All that is needed is for the Government to do their bit and everyone&#39s a winner. Unfortunately, this plan rests on the presumption that compulsion is politically acceptable and will achieve the Government&#39s objective of reducing the future cost of pension provision.

While this all sounds reasonable, there are a number of reasons for suspecting that compulsion may not be that high on Tony Blair&#39s list of priorities.

Even before the Government considers whether compulsion will have a significant impact on retirement savings, it will want to first make sure that it does not shoot itself in the foot by introducing another stealth tax.

Among the electorate, those currently in retirement would have little reason to oppose compulsion. However, compulsion is likely to be seen as another stealth tax and will not impress those electors who are still working.

Responsible workers who are already saving for their retirement will resent any Government interference. They might also redirect existing savings to fund compulsory contributions, while those low earners who are not currently saving would see compulsion as an extra tax. For someone earning the national minimum wage and working a 35-hour week, a 5 per cent compulsory pension contribution would increase salary deductions by 40 per cent from £712 to £1,003 a year.

Harsh media coverage of this might present it as a reduction in the minimum wage from £4.10 to £3.90 per hour.

Either way, it is not possible to see any immediate political benefits in compulsion. An alternative would be to limit compulsion to employer contributions.

Although this may be more acceptable politically it is far from perfect. It would be unpopular with business and would not include the self-employed.

It also may not achieve much if streetwise employers manipulate other aspects of remuneration packages to cover the administrative and contribution costs of compulsion.

While the stakeholder players will strive to keep compulsion on the agenda, it is difficult to believe the Government will want to play ball.

If this is the case, the alternative must surely be to make pensions more attractive to encourage increased contributions rather than compel extra contributions.

So far, the Government has been conservative in its approach and has simply tinkered with pensions by changing the tax structure and by introducing charge caps.

Neither of these initiatives has so far achieved much, since they have not made pension plans any more attractive or simpler to understand. This is why the most recent idea of raising the charge cap would also fail. All this would achieve is a shift in the types of plan used without having any impact at all on the overall level of pension contributions.

Given the poor take-up of stakeholder, surely the time has come for a more fundamental rethink.

The key to encouraging greater pension provision could be to address the main failing of the existing regime – that all investors must use their pension funds to buy an annuity by 75.

Solve this problem and there may be a better chance of increasing the money people pay into their pension plans.

Everyone on the pensions front line recognises that this is a key stumbling block to wider pension provision, yet the Government is still refusing to move on this important issue.

Because of the decline in gilt yields and changes in mortality, the public&#39s view of annuities is unlikely to improve – yet the Government remains committed to annuities.

This is infuriating and difficult to understand when it seems the whole market is screaming for changes to the compulsory annuitisation rule.

The key problem is that annuities can represent incredibly poor value for money for many annuitants.

Although the outcome does vary according to the annuity bought, the sad fact is that a significant number of annuitants (maybe more than 30 per cent) will not even get a return of capital.

For many, this is an unacceptably high price to pay for protection from longevity and is often the main reason for low levels of private pension funding.

Based on the feedback we consistently get from IFAs, change on this important issue is long overdue. The overwhelming message from IFAs is that removal of the compulsory annuity rule would have a more positive impact on pension contributions than almost any other initiative.

It would also ensure investors get more value from their pension plans than they do today.

Both these benefits mean that removal of the compulsory annuity rule could have a huge impact on the overall objective of reducing the burden on the state in retirement.

Although there is a need to address Government concerns about pension funds running out, preserving the compulsory annuitisation rule and encouraging even more complicated annuity products is not the way.

This will simply further complicate an already complicated subject and will do nothing to encourage greater pension contributions.

The winning solution is to remove the compulsory annuitisation rule and make changes to the existing drawdown rules to make it more difficult for plans to run out of money. Do this, and the Government really would have a reason to feel pleased with itself.

Continuing to run away from making this change and looking for the answer in existing annuity products will get the Government nowhere.

The compulsory annuitisation rule is the most outdated aspect of pension plans and its removal should be the Government&#39s top priority.

It is more likely to win votes and will make a bigger contribution to reducing reliance on the state in retirement than the cries for compulsion and a higher charge cap.


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