The pension industry's commitment to stakeholder is plain to see. At the time of writing, there are 40 schemes registered with Opra, so customers will have plenty of choice. But who will those customers be?
The Green Paper published in December 1998 identified a target group of 5.3 million people who do not have access to an occupational pension and are on moderate incomes. In answer to a Parliamentary question in January this year, pensions minister Jeff Rooker said the biggest group that will benefit comprises up to five million people whose income is between £10,000 and £20,000. Yet a number of studies have looked at these potential customers and many already have a personal pension or are under the age of 30. They seem more likely to be buying their first mortgage and life cover rather than putting spare cash into a pension.
Rooker went on to say: “That target group does not comprise the market for stakeholders. The market and the target group are different.” So while the Government might have had a customer profile in mind, the final stakeholder design is of pretty wide application. What is novel is that up to £3,600 a year can be contributed without reference to earnings. This allows grandparents or parents to invest for children or for people in work to make contributions for non-working partners.
A key problem with pension provision is not so much that people will not save at all but that they fail to save adequately. Certainly, stakeholder pensions might encourage more saving among wider groups because of their low charges and flexibility. The Government and the pension industry share this hope but expectations must be realistic. People on moderate incomes who are not saving adequately will be an important part of the stakeholder market for providers but it would be unrealistic to expect that the simple addition of another pension vehicle to the market will overcome behavioural barriers to saving. Success in reaching this market will have to be measured in a realistic fashion and further measures may be needed to maximise potential pension savings. It will be important for behavioural change to be carefully monitored so that any further policy changes can be based on evidence.
Stakeholder pensions will sit alongside other pension, savings and spending options. For moderate earners, the pressures on disposable income will be particularly intense. Many will choose to use increases in their disposable income to improve their immediate standard of living. Rainy-day savings might be the priority.
Even if the customer decides that pension saving is what they want, stakeholder will be just one market choice alongside personal pensions, some of which now offer very similar terms to stakeholder. The important thing is to measure the overall effect on long-term saving, not just the number of stakeholder policies taken out.
The challenge is to educate consumers that private pension provision of some kind is vital if they want to have a secure and comfortable retirement. The Government has a role to play here as well as bodies such as consumer groups and trade unions. The IFA role in stakeholder might shift towards reaching individuals via employers and affinity groups. Once the importance of pension saving is accepted, stakeholder pensions would seem well placed to offer people a secure and good value home for their investments.
Stephen Sklaroff is deputy director general of the ABI