With the recent first anniversary of stakeholder and the new defined contribution scheme, we look at the initial impact of these reforms
Now that stakeholder and the new defined contributions regime have just passed their joint first birthday, it is an appropriate time to take stock and analyse not only the initial effect of these reforms but also the wider impact they have had.
The obvious place to start is with some hard statistics on stakeholder sales. The recent research published by the ABI is probably the most helpful and comprehensive information that we currently have available.
According to this research, around 750,000 stakeholder plans were sold in the period from April to December 2001. And of the estimated 350,000 employers who were required to designate a stakeholder, 320,000 had done so by December, a designation rate of just over 90%.
We should not fail to give credit where credit is due and these are pretty impressive numbers. But equally, we should not just accept these statistics at face value.
The ABI research also analyses below the surface to find out more about what these figures are actually telling us. One important point to note is that the figure of 750,000 sales includes stakeholder plans taken out to replace an existing scheme held with another pension provider and so it is arguable whether they really constitute new business at all. For example, quite a sizeable chunk of the sales figures is accounted for by the wholesale conversion of the Building and Civil Engineering scheme to stakeholder. Although, to be fair, the previous Building and Civil Engineering scheme was a rather peculiar sort of scheme ' since it did not provide a pension.
Another relevant point is the level of contributions being made to stakeholder plans. The research tells us that the average contribution is £81 per month. While £81 per month is certainly a better contribution level than the stakeholder minimum of £20 per month. But even if we relate that to a salary of just £20,000 a year, that only represents a contribution of less than 5% of salary and that amount is hardly enough to finance a comfortable retirement.
And, of course, we can be confident that the average of £81 masks a considerable variation in the range of contributions being paid. So there can be no doubt that some stakeholder plans are being financed by very low levels of contribution. While it is true to say that something is better than nothing, I do hope that those who are paying only small contributions are not building up a false sense of security along with their small retirement funds.
Individual stakeholder is not the only game in town, however, and we all know that great stress has been laid on the role of the employer in providing access to stakeholder pensions.
As we consider the employer market, we must also dig a little below the surface. The designation rate looks good and is possibly better than many commentators were predicting at the start of the process. The survey tells us that over half of the stakeholder plans sold have been bought via a designated employer's scheme. But we do not appear to have any information about the levels of employer contribution that might (or might not) be going into stakeholder pensions.
This is an extremely important point for two reasons. The first is the obvious point that an employer contribution increases the level of pension the individual can expect to receive. Second, and at least as importantly, there is also a great deal of evidence from many sources that an employer contribution is crucial in persuading employees to join in the first place.
So much for volume and contribution levels. What information can we glean from the survey on who these stakeholder customers are? There is some limited information on the earnings pattern of those who have bought stakeholder pensions. We must be very cautious in this area, since earnings information was only available in 15% of cases included in the survey and so it would be unwise to draw too many conclusions. But, where earnings data is available, the majority of stakeholder customers are earning between £10,000 and £29,999 a year.
That would certainly seem to indicate that the majority of stakeholders are not being bought by high earners. Whether or not this is in line with a target market of moderate earners, I suppose rather depends on your definition of moderate. Quoting a figure of earnings of £29,999 is bound to make us think of the concurrency criteria. But unfortunately the survey cannot tell us whether stakeholder schemes taken out by people in this earnings bracket represent the individual's main pension contract or an alternative to (or replacement for) a traditional AVC.
Clearly any type of pension saving is welcome but it would be useful to know more about how people are using stakeholder and what part it is playing in the retirement planning jigsaw.
The other area we need to consider is another stakeholder market that really cannot be described as the original target market. Ever since the consultation made it clear that it would be permissible for stakeholder and personal pensions to be taken out by those with no earnings, there has been much talk about wealthy customers providing for their nearest and dearest in this very tax efficient way.
It appears that only 2% of stakeholder plans were bought for children. Perhaps this indicates that most grandparents still see a silver spoon as a more appropriate christening present or it may be that school fees are a more pressing financial need. However, the survey also shows that around a quarter of stakeholder plans were bought for people with no earnings.
It seems reasonable to conclude that many of these sales have been financed by a high earner for a non-working partner.
All this seems to lead us to the conclusion that while the nearest and dearest sales do not form the majority of stakeholders, they are a significant minority. But perhaps there may be another factor at play here. As noted earlier, although published in April, this data is based on sales up until end December. Is it reasonable to assume that much nearest and dearest business will be of the single premium at the end of the tax year variety? If this is true, perhaps a proportion of this business has not yet filtered though to industry sales figures. Only time ' and future sales figures ' will tell.
Another important point is that while all this is very interesting, it is only part of the picture. We must not lose sight of the fact that the Government's key objective is to increase the level of private pension in the UK. It follows therefore that we must look at the bigger picture and not just stakeholder sales.
Stakeholder pensions have clearly had a huge impact on the rest of the pensions world. The most obvious influence has been on charges. We now live in a 1% world, where additional charges of more than 1% have to be able to be justified, whether by the sophistication of the product or by building in the costs of full-blown advice.
The impact of stakeholder has also been felt in other ways. In the world of employer sponsored arrangements, many employers made changes to their existing arrangements as an alternative to designating a stakeholder plan.
This may have meant extending eligibility criteria or increasing the level of employer contribution to a group personal pension (GPP). All of these developments mean that more people have access to employer sponsored arrangements and some arrangements are benefiting from higher contribution rates.
So all in all, where are we? Stakeholder appears to be enjoying some moderate success. It has also had a significant ripple effect not just on charges, but also in other changes to group personal pensions and money purchase occupational schemes alike.
But there is still more to do. We still need to get more people into private pensions, we need to get higher contribution rates and we need to encourage more employers to provide pension contributions and not just pension access for their employees.
And where might we be going? We already hear some say that the initiative has failed and compulsion is inevitable. I am not so sure. Compulsion may sound like a simple concept but the mechanics could get very complex. The implications both for existing pension provision and for the wider economy would be significant.
We should beware of assuming that compulsion is the answer and make a real effort to examine other ways to encourage and persuade both individuals and employers that people need pensions. I am sure that, by the time stakeholder is two years old, there will be still more progress to record.
Only 2% of stakeholder plans have been bought for children.
An employer contribution is vital in persuading people to join stakeholder schemes.
The majority of stakeholder customers earn between £10,000 and £29,999.
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