My understanding of the reason for this was that typically, trust based stakeholder schemes would have a sponsor, such as an employer,
who would pick up the tab if
costs overran the one per
cent capped charges. But sponsors could not be expected to extend such financial backing to all comers, and would wish to place restrictions on membership - to their employees for example.
The DSS now intends to offer contract based schemes equivalent powers to restrict membership. As always specified, neither form of sch-
eme may restrict membership based on individual financial status or on the intended contribution size (above the £20 minimum). But allowing contract based schemes to restrict membership based on employer or profession introduces the prospect of indirect cherry picking.
In its worst form, a scheme might decide to offer membership only to employees
of, say, five specified employers, who just happen to have large, very well paid workforces. Surprise, surprise - the average contribution to such
a scheme turns out to be higher than that typically app-
lying to stakeholder schemes, increasing profitability.
And the more providers who cherry pick in this way, the lower quality are the pickings for the rest of the industry who play the game in line with the original intentions.
The DSS does accept the scope for cherry-picking (it even uses the phrase) but its answer is to review the position in three years' time. Three years could produce a lot of cherries.
One area, conspicuous by its absence, concerns the rules surrounding with-profits as a fund link under stakeholder. There has been intense lobbying to persuade the DSS (or should that be the Treasury) to relax the requirement to have a completely separate with-profits fund solely for stakeholder members.
Despite intense lobbying for change, the DSS letter makes no reference to this. As the time for clarification runs out, so too does the chance of stakeholder schemes offering with-profits.
So once these amendments are formally made, could this be the final, final word on stakeholder? Of course not. The DSS has already flagged its intention to review the working of stakeholder in three years' time.
Among other things, it will reconsider the rules permitting schemes to restrict membership. It may also remove the exemption for employers with fewer than five employees. We may also see the exemption conditions placed on group
personal pensions amended, hopefully in the direction of the equivalent for occupational schemes. And looking forward slightly further, there is also the prospect of the biggest change of all - compulsion. But that would take a lot more than a set of amending regulations.