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With-profits could be a hollow victory for stakeholder firms

The publication of the draft regulations on stakeholder pensions means we

have almost reached the end of the stakeholder journey having overcome a

raft of issues and consultation papers.

The shape of stakeholder is now becoming clear although some details still

need further clarification.

What we finally do know is that the Government has taken on board life

office concerns and included with-profits policies in its proposals.

The move has been widely welcomed by most life offices and, at first

sight, it appears to be a concession to the industry, which lobbied

frantically over the benefits of with-profits funds for inexperienced


But the Government&#39s insistence that stakeholder with-profit funds be

ring-fenced to protect members&#39 assets has raised concern among some

pension providers and IFAs.

They are worried that ring-fencing will put an end to cross-subsidisation

between existing with-profits policyholders and new entrants.

This would mean that if life offices wanted to offer a with-profits

option, they would have to set up a new stakeholder-only version of the


But industry sources fear that such a move would render the new fund

virtually worthless as there would not be enough assets within it to

provide the smoothing of returns that is key to the with-profits concept.

This smoothing is usually provided for new investors by cross-subsidies

from existing members. Without this cross-subsidisation, the fund becomes

more volatile as it can not draw on the spread of assets which marks

with-profits funds out from other investments. The range of assets usually

found in with-profits plans is equities, gilts and property.

Wentworth Rose managing director Philip Rose warns that ring-fencing would

inevitably mean that life offices would have to set up a new fund,

threatening the whole point as to why the industry lobbied for the

inclusion of with-profits in stakeholder.

He says: “The whole principle of with-profits is to smooth the investment

performance by using a surplus from elsewhere. But if life offices have to

set up a fund from scratch, they would have no pooled investments in situ

to draw on. As a result, with-profits would become a poorer investment and

would be less suitable.”

Scottish Mutual pension development director Leslie Gray believes such a

fund would not be a true with-profits fund unless it allowed

cross-generation subsidies.

But Skandia brand manager Peter Jordan takes a different view on the

issue. He claims that ring-fencing is vital if stakeholder is to meet its

objective of being transparent in terms of charges.

Jordan says: “Without ring-fencing there is no point in having a charge

cap of 1 per cent because this would leave with-profits providers with the

opportunity to use their with-profit assets for other reasons other than

the provision of member benefits.”

“If anything, the Government needs to go a step further to ensure complete

transparency of with-profits charges.

If this cannot be achieved, then it should not be allowed in stakeholder.”

The publication of the stakeholder regulations has also brought up a

potential anomaly in Government thinking. This is contained in the plans to

allow people to make stakeholder contributions for third parties.

The move has been greeted with incredulity from some quarters of the

industry who claim it has opened up a gaping tax loophole which will allow

higher earners to stash away cash from the taxman by making contributions

on behalf of their family members.

The scenario is reminiscent of the so-called “doctor&#39s wife” scam where

higher-rate taxpayers invested in pension plans for their partners because

of the favourable tax benefits.

The pension industry claims this takes the scam to another level with the

potential not just for doctors&#39 wives&#39 but also their sons, daughters,

grandchildren and even nephews and nieces to benefit.

Providers are particularly stunned because of the Government&#39s current

objection to allowing full concurrency within stakeholder which would allow

occupational pension scheme members to also take out a stakeholder plan.

But the Government has blocked full concurrency as it is worried that

higher earners would exploit it as another way of avoiding tax on their


Gray has expressed amazement over how the Government can rule out high

earners benefiting from taking out a stakeholder for themselves while

allowing them to fund plans of up to £3,600 for the whole of their family.

Despite providers believing the move in many ways represents a

contradiction in terms by the Government, they also feel it offers IFAs an

excellent business opportunity for tax planning for higher-net-worth


NPI business development director Stephen Ingledew says: “This shows us

that stakeholder is an opportunity for tax planning with higher-net-worth

clients and is more than just a pension plan for the lower paid. It is an

excellent tax planning tool to pass on a person&#39s wealth to their family.”

Clerical Medical pensions strategy manager Nigel Stammers says: “This

represents a golden opportunity for parents and grandparents to start their

children off on the pensions road. It is an opportunity that no IFA can

afford to miss.”


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