In a letter to the ABI and Autif last month, Department of Social Security head of private pensions John Hughes laid out a series of amendments to stakeholder pension schemes.
The most controversial part of the amendments, seen by many in the industry as the Government backtracking on its original aim of enabling lower earners to save for retirement, relates to permitted restrictions on membership.
The changes remove the differentiation between trust-based schemes and those run by authorised scheme managers in response to arguments from some of the industry, notably Autif.
Previously, trust-based schemes could ban members on grounds of employment, employer, trade or profession but authorised scheme managers could not.
Now both schemes can use these categories as a means of selecting members. However, discrimination on grounds of financial status or contribution levels is still not allowed.
The DSS's move has had a mixed reaction.
Scottish Equitable pensions development manager Steven Cameron was shoc ked. He says: “I find the reasons for this change hard to understand. The original intention behind stakeholder was to ensure that pension schemes are open to everyone at a low cost, with good value and, most important, wide-entry criteria.
“The Govern ment now seems to be back tracking on its aim to allow people who can only pay £20 a month to be entitled to a reasonable pension. Scottish Equitable will not be cherry-picking and our stakeholder schemes will remain open to anyone who wants to join.”
Cameron says, for sound comm ercial reasons, some firms might exclude groups of individuals who can only pay £20 a month. He says a concern is the prospect of niche stakeholder providers springing up that will poach high-income groups.
But Scottish Life head of communications Alas dair Buchanan sees the amend ments as a positive move. He says: “The new measures are creating a level playing field for trust-based schemes and those run by an authorised scheme managers and this has to be a good thing. The inconsistency that was leading to odd practices in the market has now been removed.”
The DSS claims that the new system is fairer than the previous set-up. It will be reviewing if the changes do encourage cherry-picking in three years, which it says is a reasonable timeframe to decide if the new rules are working.
Buchanan agrees this would give the market time to settle down and to gauge the impact of the amendments but others fear it will leave a three-year opening for abuse.
A number of other amendments are included in the letter from the DSS.
Previously, specific payment methods – cash and credit cards – could not be accepted under stakeholder schemes. The changes to methods of contribution inc luded in the letter mean that cheques, standing orders, direct debits and direct credits must be accepted and schemes can accept contributions by any other method they wish. This aims to give members flexibility in making contributions.
Cameron praises this move. He says: “Thanks to lobbying by us in the industry, cash and credit cards were listed as unacceptable payment methods in the original stakeholder scheme but in this flurry of activity we overlooked the administrative problems that switch cards would cause. Now it is up to us to decide if we accept switch as a method of payment.”
Another amendment welcomed by Cameron is that schemes do not now have to issue annual statements to members within three months of the end of a statement year, which is the same for all members. This change removes an intense peak in workload for stakeholder providers at one time of the year.
An important aspect of the original stakeholder scheme was transparency for members' charges. But in view of the practical difficulties and cost of compliance of this requirement to disclose monetary charges it has been replaced with a stipulation to disclose just the annual percentage rate of charge.
Cameron says: “This is a good relaxation, as we were in a situation where we had to calculate the exact charge to each member on every day of the year, even though it is far from clear whether or not members were actually interested in this figure.
“However, we have not decided if we will now stop this daily calculation and use annual percentage rate of charges instead as we now have the systems in place to cope with either method. We will decide what is best for our members and business.”