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Tale of two necessities

Over the next 16 months, every employer with at least five employees must

choose between facilitating stakeholder or offering a different pension

scheme to employees. For small and medium-sized employers, the choice is

likely to be between stakeholder and group personal pensions.

As each month goes by, the issues which unite and separate stakeholder and

GPPs become a little clearer although it may not be until the autumn that

we know the FSA&#39s final rules for stakeholder.

It may be helpful to think of stakeholder as a restricted form of GPP.

This follows from two observations – first, that the Government expects

most stakeholder schemes to be set up in the personal pension format and,

second, that the stakeholder regime imposes constrictions which do not

exist in GPPs.

In essence, a GPP will exempt an employer from having to offer stakeholder

if it has an employer contribution of at least 3 per cent and no exit

penalties. The stakeholder constrictions are not simply the size and shape

of the charges but also things like investment flexibility, statement of

investment principles, the methods of paying for individual advice, the

timing of the set-up of the arrangement and workplace access.

The key aspect of investment flexibility for stakeholder is with-profits.

We know that with-profits will be allowed but the devil is in the detail

and the ring-fencing req-uirement could yet mean that few stakeholder

schemes will be able to offer this option. Bearing in mind the proportion

of money-purchase members who opt for with-profits – often 50 per cent or

more – that would be a serious restriction. GPPs are not restricted in

this way.

Stakeholder schemes will be required to issue a statement of investment

principles even though other fully-insured schemes, such as GPPs, need not.

This raises the possibility that stakeholder members may wish to change

their investment decision because they disagree with the investment

principles of a fund. If the stakeholder scheme offers few investment

funds, that might mean moving out of the scheme.

Paying for individual advice is particularly nasty under stakeholder. A

separate contract must be drawn up for any such advice which cannot be

provided under the 1 per cent charge cap. I understand that payments under

this separate contract will not be counted as pension contributions. If the

employee pays, it will be out of taxed income. If the employer pays, it may

be assessed on the employee as a benefit in kind under P11D.

The Government has not yet confirmed the value added tax position. Compare

this with GPPs, where the charging structure can be tailored to pay for

what advice is necessary as part of the premium structure.

It is not possible to accept contributions into a stakeholder scheme prior

to April 2001. This is clear from the draft regulations, yet still we hear

people talk about accepting contributions into a scheme today and applying

for stakeholder authorisation with effect from April 2001. A GPP can begin

today and, if properly constructed, will meet the exemption requirements on

an indefinite basis.

Workplace access for stakeholder means that the employer must allow

representatives of a stakeholder scheme to enter the workplace of those who

must be offered stakeholder. It is not yet clear how disruptive this might

be or how much control the employer will be allowed over the process. With

GPP, the employer tailors workplace access according to the needs of the


What are the chances of future change to the rules for stakeholder and

exempt GPPs? The Government has said it will review the rules for exempt

GPPs after three years. We have no real clue what this might mean except

that Alistair Darling&#39s public motto for GPP is “If it ain&#39t broke, don&#39t

fix it.” Stakeholder is still a political concept and may be subject to

change if it is not seen to be meeting its political objectives.

My hunch is that small and medium-sized employers will split into two

groups – those who are keen enough about employee welfare to pay at least 3

per cent will offer GPP and the more frugal will facilitate stakeholder.


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