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Never the twain shall meet

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&#39s 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&#39s 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&#39s 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

investment issues.

In the more mature 401(k) market in the US, the popularity of access to a

range of different investment houses through an employer&#39s 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&#39s 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



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