Trustees not employers will be liable for anything that goes wrong in a stakeholder pension scheme. ...
Trustees not employers will be liable for anything that goes wrong in a stakeholder pension scheme.
The paper states that trustees will ultimately be financially liable for the operation of the scheme and that if the scheme is unable to operate, within the charge limit, the trustees would be liable for any costs in excess of the charging limit.
According to the latest consultation paper trustees will have to take out indemnity insurance to protect themselves. The cost of indemnity insurance must be included within the total 1% annual charge for stakeholder.
The Government is planning for the FSA and Opra to police stakeholder. Opra already has broad powers over trustees and under the Pensions Act they can be subject to fines for breech of responsibilities. Using the same framework that currently applies to occupational pension schemes, Opra could impose a fine up to £5,000 on an individual trustee and up to £50,000 on a corporate trustee.
Employers will still be held liable in some instances and could be fined by Opra for failure to provide access to a scheme for employees.
With the advent of stakeholder the regime appears to be stricter for trustees than for other occupational schemes. In such circumstances stakeholder schemes will have a strong incentive to find alternative governance structures.
Brian Chilvers, technical marketing manager at Lincoln, said: "For trustees the key difference with stakeholder, as opposed to occupational schemes, is that on the face of it there is no one standing behind them to secure their position. Maybe the Government thinks it will be the provider. It is still not clear but as it stands people will think twice about taking on the responsibilities outlined in the DSS's paper. While professional trustees are paid, most schemes have member nominated or employer nominated trustees but the liability here is high. As a result indemnity insurance may be more costly. Typically for a reasonable size scheme indemnity insurance costs tens of thousands of pounds annually. Whether the risks with stakeholder are considered higher or lower it will impact on the insurance premiums.
Some of the liability could be switched to the provider through a contractual arrangement with the trustees. The Government has suggested that it is possible that contracts can be drawn up between the trustees and providers to minimise the risk of trustees moving the scheme to another provider. It is estimated it will take between 10 and 15 years before a product provider could recoup the losses involved in establishing a stakeholder scheme and it is unlikely the Government would allow contracts to operate for that long.
The concept of a trustee body for stakeholder pensions is still unpalatable for life offices and has many leaning towards the alternative structure the DSS proposed.
While the DSS has continued its concept of a trust based scheme it has also suggested that an alternative governance structure could be used by companies. The stakeholder manager would be authorised by the FSA and members' rights in the scheme would be governed by the terms of a contract.
The managers would also have to report to members and provide a comparison of the performance of each fund held within the scheme against an appropriate index or benchmark with the FSA supervising the choice of comparator.
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