A number of key decisions on the proposals for stakeholder pensions in a paper entitled 'Stakeholder...
A number of key decisions on the proposals for stakeholder pensions in a paper entitled 'Stakeholder Pensions - Outcome of the Consultation' were announced by the Government on 10 January. These decisions follow on from the wider consultation process that took place during the summer of 1999 when the Government issued six consultation briefs, each considering a different element of the proposals for stakeholder pensions.
This Ritchie Paper summarises the main points of this latest paper, which represents the Government's response to the first five consultation briefs, and shows how the details on stakeholder proposals are shaping up. The decisions on the sixth consultation brief - which covered the new tax regime - are being announced separately, and will be covered in a subsequent Ritchie Paper.
The announcement includes a welcome acceptance of the need for advice for some individuals, as well as clarification of the conditions group personal pensions (GPPs) must satisfy before the employer is exempt from any stakeholder requirements.
The key decisions are as follows:
l The overall charge will be limited to 1% of fund per annum.
l An additional charge will be allowed for individual advice.
l The minimum contribution can be no higher than £20.
l Small firms with less than five employees will initially not have to offer stakeholder access.
l Employers paying a contribution of 3% to a GPP which has no exit penalties will not have to offer stakeholder access.
l Employers who do have to offer stakeholder access must now arrange this by no later than October 2001.
The announcement confirms that the maximum allowable charge will remain at 1% of fund per annum. However, extra charges will be allowed for additional services offered to scheme members on an optional basis. So, although schemes will be required to provide information and explanatory material to potential scheme members, individual financial advice can be charged for by an additional fee. However, clarification is still required on how this additional fee will be paid. It is unclear whether it will be in the form of an upfront fee or spread over time by making a deduction from contributions or the accumulated fund.
Within the 1% cap, schemes will be allowed to charge different groups of members different amounts. So, it will be possible to have a single stakeholder scheme with some members paying a charge of 1% pa, and others, perhaps those with a specific employer or with larger funds, a charge of, say, 0.9% pa.
The Government has indicated that it still believes that decision trees will be an intrinsic part of the stakeholder decision process (despite industry doubts). It has confirmed that further work is being carried out on them, including how best to highlight when additional advice is required.
The maximum allowable minimum contribution has been increased from £10 to £20. Members do not have to contribute with any specific frequency (for example, monthly or annually) so £20 will also be the minimum single contribution allowed. Although this increase is to be welcomed, an individual making a £20 contribution should still be concerned that for every £1 of pension purchased with his or her end 'pot' of money, he or she may end up receiving £1 less income support through the minimum income guarantee (MIG). There have been recent press leaks which suggest the Government may be looking at this issue.
Finally, schemes will have to nominate a suitable default investment option, but the issue of whether investment in with profits will be allowed is still being discussed.
It had been proposed previously that all employers would have to facilitate access to a stakeholder scheme for all employees earning above the lower earnings limit who were not eligible to join an occupational or a good group personal pension scheme. There have been some relaxations and some clarification here.
Small firms with fewer than five employees will not initially be required to provide access to a stakeholder scheme (ie. there is no need to designate a scheme or to forward contributions through payroll deduction). This accounts for two-thirds of the country's employers and means that an extra 750,000 employees will have no access to a stakeholder scheme through their employer, leaving them to make their own arrangements. These amendments greatly increase the numbers approaching stakeholder as individuals and in doing so create even greater barriers to the Government achieving its aim of attracting 50% of the target group into stakeholder. It could be argued that this opens up more business opportunities for IFAs operating in the individual pensions market, but there remains doubt whether this market can be profitable in the long term.
Employers offering GPPs to which they contribute at least 3% of earnings will also be exempt from providing access to a stakeholder scheme provided the GPP applies no 'exit charges'. We need clarification on the definition of earnings - the concern being that this may be total earnings (ie. including commission, bonuses and other fluctuations) as opposed to basic salary. We also need confirmation on exactly what constitutes an exit charge. This exemption, along with that for small firms, will be reviewed three years after stakeholder begins.
It appears that to give exemption, the GPP should have a waiting period of no more than three months (this is slightly at odds with proposals that occupational pension schemes can have a waiting period of 12 months, as discussed below).
Consultation brief two had proposed that employers who are required to arrange stakeholder access would have a year to do so from the introduction of stakeholder, for instance until April 2002, but this latest paper has brought the deadline forward to October 2001. Employees must be offered access within three months of joining, rather than im
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