Reading articles about stakeholder, one could be forgiven for coming to the conclusion that there are three types of employer:
Those who have heard about stakeholder and are trying to avoid it.
Those who have heard about stakeholder and believe it does not apply to them.
Those who are blissfully unaware of the existence of stakeholder.
Little mention is made of the many employers who do know about stakeholder and believe it to be the right solution for their needs. Many articles have made it clear that stakeholder will have significant cost and resource implications for employers and have suggested that alternative arrangements be made to avoid the need to set up a stakeholder scheme. Oddly enough, articles of this nature tend to originate from providers which appear to have no plans to launch stakeholder pensions.
But is aiming for avoidance an appropriate course of action? Why is there a need to avoid stakeholder? Will stakeholder, in fact, provide the right solution for many employers and their staff?
For IFAs advising on group pensions, the penalties for getting the answers to any of these questions wrong could be quite high. It is important clients are made aware of the facts regarding exemption, so let us deal with employers who come under the latter two categories first.
Are there five or more employees? It does not matter whether they are full-time, part-time, directors or any other category, the only consideration is the number. If there are five or more employees, there is an obligation to offer a stakeholder facility to each employee unless the employee falls into one of the following categories:
Has been employed for less than three months.
Has earned less than the National Insurance lower earnings limit in any week during the last three months.
Is offered membership of an approved occupational scheme. A waiting period of up to 12 months is acceptable and any individual under 18 or within five years of normal retirement date can be ignored.
Is offered a good value personal pension plan (except those under 18).
A good value personal pension is regarded as one with:
No exit penalties.
No penalties for stopping contributions.
An employer contribution of at least 3 per cent of basic pay (ignoring commission, overtime and bonuses).
The employer can insist on a specified contribution from the employee of no greater than 3 per cent of basic pay. If the employee turns down the invitation to join, a stakeholder facility need not be offered.
If the personal pension offer is made before October 6, 2001, the employer's payment can be more than 3 per cent but the employee cannot be asked to pay in more than the employer. The employer could, for example, offer to contribute 8.75 per cent, provided the employee matches this. From October 6, 2001, the rate specified for employees cannot be greater than 3 per cent of basic pay.
For employers who have heard about stakeholder and are trying to avoid it, why should this be done?
Extending membership of existing arrangements
For some employers, it may be sensible to make alternative arrangements to ensure exemption. For example, a big brewery chain has 90,000 employees earning under £9,500 who are not eligible to join the occupational scheme. Around 80 per cent of these leave within six months. As staff turnover is high, the costs of administering and running a stakeholder scheme would be substantial.
A sound case could be made for such an employer to change the joining rules of the existing scheme to allow membership for all employees over 18. It would be possible to have a rule requiring a waiting period of one year before joining.
The employees are not losing out as they could contribute to a stakeholder of their own choosing during the waiting period. If they are still employees in 12 months, concurrency rules would allow them to continue with their stakeholder, provided their salary was below £30,000 and they had not been appointed a controlling director in the meantime.
Occupational schemes offering death in service benefits only
Occupational schemes are suitable alternatives even if they only provide death in service benefits. If the only reason for setting up a scheme like this is to avoid stakeholder, it should be remembered that the employer does not need to contribute to stakeholder.
The employer should be asking what it is achieving by offering this option. It is incurring the cost of the death benefit provision but avoiding the perceived hassle and cost of meeting stakeholder access requirements. The employee is, however, losing nothing, even if the employer does not contribute to a stakeholder facility, as they can take advantage of the offer of life insurance and take out a stakeholder with their chosen provider.
Group personal pensions
Apparently, some employers are looking to avoid the need for stakeholder by offering a contribution of at least 3 per cent to a GPP. It is sometimes suggested the employer's cost could be met by the individual sacrificing salary.
This would currently be acceptable, provided that every employee is happy to accept the concept. But it only needs one to turn down the offer for this idea to become unsuitable and for a stakeholder facility to be necessary.
It is widely thought some or all of these “loopholes” will be closed. In most instances, there will be no benefit to avoiding stakeholder and the possible alternatives will mean a similar or greater amount of paperwork and administration. The employer does not even have to contribute to a stakeholder plan and only needs to set up a facility.
In fact, stakeholder pensions will often provide the right solutions for both employers and employees.
STEVE MEREDITH, Financial planning adviser, Clerical Medical