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Staking a solid future

Steven Cameron, manager (pensions development) at Scottish Equitable analyses the implications of the final stakeholder regulations

It seems that in pensions,

finality comes only with death. When the Department of Social Security (DSS) produced the final stakeholder regulations on May 25, 2000, we knew that they would be final only until they were amended. A few changes were always expected before the April 6, 2001 implementation date.

In November 2000, the DSS wrote to the Association of British Insurers and the Association of Unit Trusts and Investment Funds, confirming that in addition to a lengthy list of technical corrections, it was working on more substantive changes in a number of areas. The aim was to issue amending regulations in January 2001. So what exactly are these changes and what implications do they have for stakeholder pension schemes?

The regulations produced last May, state that schemes must accept contributions by any method chosen by the member, with the exception of cash or credit card. While these exceptions, which the industry fought long and hard for, were initially welcomed, it was not long before someone remembered the Switch card in his wallet. The amending regulations require stakeholder schemes to accept payment by four prescribed methods &#45 direct debit, direct credit, cheque or standing order. The scheme remains at liberty to offer other payment methods.

This amendment is largely welcome. The only slight issues concern standing orders, which are more expensive for providers to process, and tax relief. If the gross contribution is to be maintained, the policyholder will have to adjust the net contribution each time there is a change in the basic rate of tax.

Originally, the regulations stated that a stakeholder pension scheme must choose a statement year which would be identical for all members. Each member must then receive an annual statement within three months of the end of the

statement year.

It should be remembered that stakeholder schemes will be very large. An employer who designates a scheme does not have his own stakeholder scheme &#45 his employees are offered the chance to join a much larger scheme, which also contains members from many other employers. Thus, the requirement for a common statement year would create a major peak in provider workload during three months of each year.

The DSS now plans to allow the provider to specify different statement years for different members. Again, this is a welcome victory for common sense. It will allow providers to base statement years either on the date an individual joins, or possibly on the date from which an employer designates the scheme.

The regulations specify what information must be provided in the annual statement. One of the most contentious issues was the requirement to disclose the precise monetary value of the charges deducted over the year. The systems challenge of doing this should not be underestimated, particularly if the provider plans to deduct the single fund charge (one per cent or less) implicitly, before setting the unit price.

Implicit charging is commonly used throughout the financial services industry and is relatively simple for the consumer to understand compared with regular cancellation of units to cover charges. So this requirement was creating a huge amount of systems development work for what many see as little gain &#45 with tightly capped charges. It could be argued that such precise monetary disclosure is at best spuriously accurate and at worst wholly unnecessary.

Here, the DSS accepted the arguments only up to a point. In recognition of the systems issues, it will give providers the option of replacing the cash amount by disclosure of the annual percentage charge &#45 but only for the first three years

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