With the 8 October stakeholder deadline now passed, speculation has already started on the relative success of the Government's flagship pension scheme
It is fair to say that 8 October was always going to be a key milestone in the development of stakeholder pensions ' the date by which all employers with five or more employees had to set up or designate a stakeholder pension scheme or have an alternative arrangement in place.
There will be a temptation to draw conclusions from data available around 8 October on whether stakeholder pensions have been a success and whether they have reached their target market. Some may wish to go further and speculate on what the statistics say about the future direction of the Government's welfare reform programme. This article examines some of the points that must be considered at this stage in the process.
To answer the take-up question properly, you need to look beyond the basic stakeholder data on the number of schemes and members. To measure the real impact of the Government's proposals on increased pensions coverage you need to look at:
l The extent to which existing occupational and group personal pension schemes have extended their eligibility criteria to take in employees who were not previously members.
l The number of new schemes of all types that have been set up ' not just new stakeholder schemes.
To examine if the Government has reached its intended target market, generally described as those earning between £9,000 and £20,000, you need to look at the earnings of those who have started not just a stakeholder pension but all the other forms of pension described above.
This is clearly a considerable task so we should be wary about jumping to conclusions too early. Nevertheless, the extent of increased pension take-up is an important question that should be answered in order for the Government to be able to decide if it has to take any further action to meet its original objectives.
The designation process for stakeholder pensions was supposed to start in October 2000 and run for one year. This would have allowed for six months of pre-selling before contribution collection started in April this year. In the event, the stakeholder regulations that were published in May 2000 were incomplete in many important areas and the gaps were not filled until the second amendment was published in March this year. This meant providers were not able to finalise their stakeholder products until around the time contribution collection started and very little pre-selling actually took place. Providers and advisers had six months to get round the target 450,000 large employer market.
With the prospect of an Opra fine of up to £50,000, it is expected that many advisers will have concentrated in the first instance on the setting up of a stakeholder scheme to meet the employer's obligations, leaving the populating of that scheme as a later exercise. This means that the number of empty or shell stakeholder schemes on 8 October was not necessarily an indication of apathy on the part of employers or a lack of success in stakeholder take-up. It could simply be that stakeholder membership of these schemes will take place over the coming months.
Those who seek to interpret the statistics available so far have tended to interpret them as a failure of the Government's policy and have used them as a basis for renewing the call for compulsion. Those who do so are not only prescribing a cure before the disease has been fully diagnosed, they are:
• Giving an incomplete prescription (what exactly do they mean by compulsion?)
• Ignoring the possibility of side effects
• Failing to consider alternative medicines.
Who is to be compelled to contribute if compulsion were introduced? Is it the employer or the employee, or both? Is it to apply irrespective of earnings? What account is to be taken of the higher rate of accrual that will apply to lower earnings bands when the State Second Pension is introduced next year?
More importantly, what account is to be taken of the Minimum Income Guarantee when it starts at £100 per week in April 2003? If the combination of the basic pension and the new State Second Pension will leave many dependent on the Minimum Income Guarantee for years to come, will compulsion not look regressive in terms of wealth distribution in that it will force low earners to pay themselves for something they would otherwise have got from general taxation? Forcing an employer to pay may be no better if it ultimately impacts on the employee's earnings.
Many have rightly questioned the ability of low earners to contribute but you can take this a stage further by asking what would happen if compulsion did apply to them. Would they and their families not end up relying on other means-tested benefits to fill the gap caused by having to contribute to their pension? If so, the Government will in effect end up paying for these contributions out of general taxation and will have increased the numbers reliant on means testing.
If it is therefore not practicable to apply compulsion to those earning below £20,000, will it then apply to those on higher earnings? Not only will this introduce another awkward earnings threshold into a system that probably already has too many earnings tests, it will also introduce compulsion at its fullest for those in an earnings bracket that the Government described as 'almost all in private schemes' in its original green paper.
Compulsion could clearly mean lots of different things and would not be straightforward. Those who call for compulsion should explain what they mean by it so that the exact implications of their proposal can be considered.
The side-effects of compulsion also need to be considered. It seems reasonable to assume that the more compulsion we have, the less need there is for incentives such as contribution tax relief in its present form. Given the past lobbying on the retention of the existing system, we need to be careful about advocating something that will undermine the arguments for its further continuation.
If the Government concludes that it must do more to increase retirement savings, it will want to consider all possible alternatives ' not just compulsion. It has made a start by simplifying pensions, at least in their charging structure. If the complexity of pre-stakeholder pensions was a discouragement to those who might have saved for their retirement, is there not a step before compulsion that involves more encouragement?
Encouragement could be targeted at employers as well as employees and, fortunately, examples already exist in the American 401(k) system, which has long been seen as a role model for stakeholder pensions.
Under 401(k), senior management qualifies for tax breaks on their own pension contributions only if they satisfy certain criteria regarding contributions to the schemes for their employees. Different taxation systems in the UK are unlikely to accommodate a direct copy of this point but the principle may be worth exploring.
More importantly, further incentives could be offered to employees. If a major barrier to contributing to a pension is the commitment of tying up scarce funds for many years, you could look at the US model of allowing loans from the funds for any reason and absolute withdrawals for certain defined reasons of hardship. The tax implications of this would have to be considered but, again, the principle is worth examining if greater encouragement is being sought.
Pensions is a multi-dimensional subject that touches on social, fiscal and political issues. Simple answers rarely, if ever, exist and we need to recognise this when speculating what the future may hold.
To answer the stakeholder take-up question properly, you need to look beyond basic data on scheme numbers.
The general stakeholder target market is people earning between £9,000 -£20,000.
Pension compulsion looks impractical for people earning below £20,000.
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