Stakeholder pensions will be approved under Chapter IV of the Taxes Act
1988, which also deals with setting up personal pension schemes.
Stakeholder schemes will therefore be personal pension schemes which
satisfy additional regulations, including a limit on charges which can be
taken from the funds, the availability of a default investment option and
satisfactory governance provisions.
At present, personal pension providers normally set up one personal
pension scheme and individuals apply to become members of that scheme.
Employees participating in a group personal pension will individually join
the provider's personal pension scheme.
From April 6, 2001, providers seem likely to offer both a personal pension
scheme and a stakeholder scheme to cover all their busi- ness. If an
employer sets up a stakeholder scheme, his employees will then join the
stakeholder scheme – there will not be a separate scheme for each employer.
But if the employer continues to use a group personal pension, employees
will join the provider's personal pension scheme.
Draft regulations indicate that personal pension and stakeholder schemes
do not mix. So you cannot go into a stakeholder scheme and decide at a
later date you would like, for example, access to different investment
options at a charge which would breach the 1 per cent limit, the
stakeholder scheme will not be able to offer this.
Individuals seeking that option will have to transfer from their
stakeholder scheme into a new personal pension. Equally, if an individual
goes into a personal pension scheme and subsequently, for any reason, wants
to move to a stakeholder then he or she will have to transfer from the
personal pension scheme into a stakeholder.
There are, of course, practical implications. If a group personal pension
is set up today seeking to be treated as stakeholder from April 6, 2001,
the members in the group personal pension at that date will have to
transfer into a new stakeholder scheme.
It seems very likely that further work will be needed both by the adviser
and provider in April 2001 to convert any GPP to stakeholder although we
may see some simplification of the requirements in forthcoming transfer
But if a GPP being sold now satisfies the additional criteria to allow the
employer exemption from offering stakeholder, then it is more robust beyond
2001 with arguably no real need to change to stakeholder, especially if the
basic charges match the stakeholder price.
The requirements for GPPs to exempt an employer from offering stakeholder
are, in principle, straightforward but will need some important further
clarification. The requirements are:
All employees must be offered access to the GPP within three months of joining.
The employer must make a contribution of at least 3 per cent of earnings –
defined as basic earnings, so there is no requirement to contribute 3 per
cent of fluctuating commission earnings, for example.
The offer of membership on this basis must be written in to the contract
of employment. The offer can be made conditional upon a matching employee
contribution of up to 3 per cent. There is, of course, nothing to stop
employer and employee paying a higher level of contribution, for example, 5
per cent from each, providing this is not a requirement of joining the
scheme, or to stop the employer basing contributions on total earnings.
There must not be any exit charges on the GPP product. Clarification of
which charges in a contract would be regarded by the DSS as exit charges is
clearly needed. Employers must not be left in any doubt as to whether or
not they are exempt from the access requirements.
We do not believe that GPPs set up to gain exemption from stakeholder
access should become an endangered species after April 2001. We believe
IFAs have an important role in continuing to drive the employer-sponsored
defined-contribution market. In assessing whether the GPP or stakeholder
product will be most popular, the key issues are:
How will the IFA's costs in selling to the employer be met? Will this be
by a fee from the employer or will the IFA be expected to recover costs
through commission or a combination of both?
What level of information and advice will be provided as part of the
scheme if individual advice is being offered? How will the cost of that
advice be met? Will it be by fee from the employer, fee from the employee
or have to be taken from the contract by way of commission? Note that, even
in stakeholder, there is nothing to prevent individual advice costs from
being taken out of the product, provided that the overall 1 per cent charge
is not breached.
What fund choice will be offered to employees? It is expected that
stakeholder will offer a variety of funds, as well as the default
investment options. But we see consumers becoming increasingly aware of
In the more mature 401(k) market in the US, the popularity of access to a
range of different investment houses through an employer's scheme is
unquestionable, with the ability to switch between investment approaches
without switching the entire scheme.
It is reasonable to assume that access to well-known investment houses
will become a popular feature of the defined-contribution market in the UK.
Employees may seek a stakeholder pension, either in the light of
Government advertising or consumer press promotion. The Government has
already made clear that their advertising will not follow the theme that
stakeholder is the best option available but will instead indicate that it
offers a valuable new choice.
In pushing the market forward, advisers will take different approaches on
the prop- osition to put to the employer and on the adviser's remuneration,
and may be influenced by the attitudes and profile of the employer and
Those IFAs charging fees, which therefore do not have an impact on the
charging structure of the product, will have greater scope to offer
individual advice and wider fund choice within a stakeholder-branded
product. But we all know that many employers will be unwilling to pay fees.
The employee profile is likely to result in differing attitudes and demand
for investment propositions.
But as the awareness of investment issues develops – more rapidly in
some sectors of the market than in others – the demand for wider
investment choice and advice relating to it charged within the product may
be more prevalent and require a charging structure higher than stakeholder
would permit. Good GPPs will be the better option in meeting the needs of
those consumers. There are two major conclusions:
Even though they derive from the same core legislation, Stakeholder and
personal pensions will not mix. Consumers wanting to move from one to the
other will have to transfer between schemes.
Group personal pensions will be the better choice in some sections of the
market beyond 2001, especially if their basic price matches stakeholder
levels. Their key advantage will be flexibility for higher charges to
reflect individual advice and investment propositions superior to