Stewart Ritchie recaps the areas of stakeholder still under debate before the release of the Governm...
Stewart Ritchie recaps the areas of stakeholder still under debate before the release of the Government's series of consultation papers
Cat stands for costs, access and terms. The expression derives from Isas but with Isas the Cat standard is voluntary. With stakeholder, however, if your scheme does not meet the Cat standard it cannot be called a stakeholder. There are three key issues for resolution.
First, what should the cap on charges be? The Pensions Green Paper makes it clear only one charge will be applied for basic stakeholder membership. An understandable view from the Government is that the cap should be as low as possible. However, it needs to be understood that:
l the lower the cap, the greater the risk of financial failure of a stakeholder scheme, with potentially disastrous public reaction;
l less advice can be provided, so the greater the risk of either mis-selling or mis-buying;
l the cost of advice for people who end up not joining has to be allowed for;
l the less likely it is that providers of other pensions products will feel able or willing to bring charges into line with stakeholder;
l if stakeholder is so successful that prov-iders are making large profits, market forces will correct that. Ultimately it will be competition between providers that will determine actual charges, not legislation.
Second, what services should be covered within the cap on charges? Another way of looking at this question is to ask what non-core services may need to be provided and charged for on demand. An obvious one is advice on pensions and divorce.
Here the stakeholder scheme's involvement will be tailored to the member's needs, and it seems unlikely that such inexpensive service could be paid for under the cap. Other examples may be advice on transfers out and in and the arrangement of any non-standard benefit as life cover, contribution waiver and income drawdown.
The third issue for resolution is access. What should schemes be obliged to offer? Access is central to stakeholder but has not yet received the attention it deserves. Will a particular stakeholder scheme be able to set conditions for access, such as membership of a particular trade union or employment in a company? Will it be able to insist on receiving contributions through an employ-er's payroll deduction facility or will it be obliged to receive contributions in a variety of ways, some of which may be inefficient and expensive?
The way this last question is answered will have a significant bearing on other issues such as access for the self-employed, parallel contribution to more than one form of pension and the clearing house concept.
Trusts and governance
The Pensions Green Paper sees a trust-based structure as the initial way forward for stakeholder but is willing to consider alternatives. GPP is a prime candidate as an alternative governance structure.
There are significant differences of opin-ion about the composition of such a board of trustees. Some say they must be independent, which would rule out not only service providers but also representatives of the body that set up the scheme. They may have set it up for a purpose not solely related to pension provision and may seek to further that purpose if on the trustee board. In such a scenario, the description stakeholder would seem to be a misnomer.
Other key issues about the trustee approach include ensuring the calibre of the individuals, whether and how much they would be paid, what risks they will run on the scheme's behalf and the cost of advice they will need to perform their (as yet unclear) duties.
A guiding principle might be 'do no harm'. Harm may be caused if an employee were separated from a significant employer contribution or the automatic provision of risk benefits. It may also arise if someone started a pension vehicle in 1999 and found in 2001 or later that a transfer to stakeholder would involve significant penalties. Harm would also be caused if someone who ought to start a pension vehicle did not do so because they were put off by the complexity involved or because nobody could afford to give them the level of advice required by the regulatory regime.
Realistic requirements and expectations about knowing your client or best advice. If the sales process (as opposed to the advice process) is being controlled by people, such as a board of trustees, who are well-intentioned but are not experienced sales professionals, there is a danger that the same management failures seen in personal pension mis-selling will be repeated in stakeholder. It may be that the FSA will need to be extra vigilant regarding the sales process of trust based stakeholder pensions because of this.
The Green Paper states that employers who do not offer an occupational scheme will be required to identify a stakeholder scheme and to facilitate access to it for their employees. This will mean providing information to employees and allowing the nominated scheme reasonable access to the workforce to promote the scheme. It would also require the employer to operate a payroll deduction facility for those employees who joined the stakeholder scheme.
This raises several questions. Will employees being offered membership of a GPP still need to be offered stakeholder, and if so under what circumstances? What exemptions will there be on the grounds that the employer is too small to have this burden imposed? It is important to remember that there will be no obligation for employer contributions to stakeholder.
The tax regime
There are important questions about the tax regime. Will the £3,600 annual ceiling for stakeholder pensions be changed before stakeholder starts? How will the annual ceiling be indexed? Will contributions to stakeholder be deducted gross or ne
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