There is little argument against an initiative to encourage more and more people to save for their f...
There is little argument against an initiative to encourage more and more people to save for their futures. Demographic changes and fluctuating employment patterns are amongst many factors that influence the way we live and spend our time. Our culture would now seem to want to promote prolonged quality of life. Privately, though, how many of us wonder how we will fare in our own twilight years? How will we attain the quality element for ourselves and those closest to us?
The Government supports a concept that each one of us can take active control of our lives by being a 'stakeholder' in society. The stakeholder pension concept can be regarded as a reflection of this belief. It is imperative for its success, therefore, that the stakeholder pension initiative should succeed in attracting a large number of customers.
But if the stakeholder pension is to be the answer to the undoing of the complexity that has dogged public understanding of appropriate pension provision in the past, we hear a lot about not enough people having adequate pensions in place, there is a big job to do to build this new pension concept into people's consciousness as quickly as possible.
Pension providers like us can help do this in an environment where employers and the Government also make a sustained impact on low awareness levels.
To meet the Government's objective of encouraging private pension provision we need to build the culture wherein individuals understand the need to save for their retirement and can have confidence in simple, flexible and value for money pensions.
Moreover, consumers need access to good advice. Providers can make new funding vehicles available, but the Government's communication programme with employers and the public will be a key driver of take up.
Other drivers will be the regulation of the sales process and the extent to which this will meet consumer requirements and expectations for a simpler product proposition; stronger incentives for individuals to save; and the need to overcome the disincentives to save caused by the minimum income guarantee (MIG).
Assuming the Government manages to embed their pension reforms, then stakeholder pensions will become the archetypal benchmark for pension products in the UK. So what will be the impact on existing methods of pension provision?
The impact will depend on whether the alternative proposition offers clear advantages to the consumer or the employer through product features, service, communications, employee benefits design and, importantly, advice.
Let us consider personal pensions first. A stakeholder pension is a personal pension that satisfies the minimum standards prescribed by the DSS. All the simplifications in the tax regime for stakeholder pensions apply equally to personal pensions except that personal pensions written before April 2001 can include waiver and flexible life cover. For stakeholder, unless advice is provided within the 1% cap, it has to be a separate contract with income tax and VAT implications. Private pensions will be a growth market as a result of public awareness over the next 18 months. This is good news for personal pensions, especially as I don't expect individuals and their advisers to draw up separate contracts, considering the tax implications.
Fortunately, in most cases advice by stakeholder pension providers will comfortably fall within the 1% zone and separate contracts will be limited to individuals who require indepth personal advice or wish to include additional features. Our research endorsed the widespread belief that there remain many individuals who require and value personal advice allowing for personal pensions with charges exceeding 1% to be targeted accurately to this established and, in most cases, readily identified group of people. Again welcome news for the industry.
Let us consider two important factors that will inevitably enter the stakeholder arena, the power and influence of the media and, the regulators. The regulators and the consumer press have welcomed the stakeholder pension concept, so much so that other pension schemes risk appearing expensive, inflexible and complicated.
Personally I feel the current market offers a range of strong products and I have every confidence that it will continue to do so, especially with pre-stakeholder phase products.
Occupational pensions and GPPs on the other hand require the support of the employer, and the employer's ability to enthuse the employee to join an occupational scheme.
It is true that many people have benefited from schemes to which their employer has also made a substantial contribution. However, they have proved not so attractive to individuals who regularly change their employment or leave after a few years of contribution.
This is especially so for employees who only get a refund of their own contribution after tax reduction. People who have changed employers throughout their career are also disadvantaged and quite often they have ended up with a small number of entitlements fragmented across a number of employers, or no entitlement at all. Interestingly Pensions Minister Jeff Rooker, found himself in a similar situation having worked for four employers before he embarked on his parliamentary career.
Occupational pension schemes can be quite expensive to administer, especially for the small to medium-size company who can end up paying out quite a tidy sum of money.
This is not such a problem for the big schemes but, nevertheless, is still a factor which must not be overlooked. Added to the normal costs of administering the scheme, communicating its benefits and investing the assets on a day to day basis, are the additional costs of legal, actuarial and investment advice; the cost and expenses of the tr
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