Stakeholder is up and running and in the next six months, hundreds of thousands of UK employers face...
Stakeholder is up and running and in the next six months, hundreds of thousands of UK employers face the task of choosing a stakeholder scheme for their workforce.
Failure to do so could result in a fine, although a recent Prudential survey suggests that this is the preferred alternative for many organisations. However, it may come as a surprise to learn that stakeholder isn't the only pension arrangement in existence. Many may choose to set up a suitable alternative scheme instead, such as a group personal pension. The Government has stated that, subject to certain criteria, an employer running a group personal pension will be exempt from providing a stakeholder scheme. The key condition is that the employer must pay a contribution of at least 3% of each employee's basic earnings. This exemption will come under review in three years but the question is why would an employer choose to go down the group personal pension route?
To answer this, it is important to examine five key areas:
l Financial advice
l Employee opinion
From the regulatory viewpoint, personal pensions and stakeholder pensions are governed by the Defined Contribution rules that came into effect on 6 April 2001 so contribution limits, benefit limits and taxation are now the same.
The key difference is that stakeholder pensions have standards, including the 1% charge, minimum £20 contribution (no frequency limit), no exit penalties and default investment option. Group personal pensions do not have to comply with these standards and are therefore not constrained by the 1% charge. As with traditional occupational schemes, the employer sets the contribution collection rather than the employee.
Next come employer responsibilities. Whichever way you look at it, UK employers feel they are to be responsible for stakeholder pensions and it will often be down to the employer to choose a scheme without the help of a financial adviser. After family tax credits, this is most unwelcome and many feel that they are fast becoming a branch of the DSS/Inland Revenue.
For the smaller employer in particular, these responsibilities are demanding. They include:
l Payroll deduction
l Provision of information
l Contribution administration
l Record keeping
The employer must only provide payroll deduction for the specific scheme. However, there is a real possibility of having to adjust deductions for a multitude of stakeholder schemes in the future, as new employees join with their existing arrangements.
Designation itself may cause a real headache. There are currently 45 stakeholder providers on the OPRA list, but which provider should an employer choose? Many anticipate that this list will consist of five in three years, and so the choice of provider will be important if the employer does not want to go through the hassle of changing schemes in the future.
It is also important to bear in mind that the employer may have to help employees with the decision tree process and possibly pay for advice whenever it is required. There are then the threats that mainly surround contribution collection and record keeping. The stakeholder provider has a duty to report the employer to OPRA for failing to comply with regulations, which may result in a fine.
Financial advice, or perhaps the lack of it, under the stakeholder regime is an area of growing concern in the pensions industry. Stakeholder pensions are to be distributed without face-to-face financial advice. Instead, decision trees will take over as the medium through which an employee will decide whether to join and how much to pay.
The worry is that many people will end existing pension contracts and perhaps transfer funds to a stakeholder pension when they may have been better off staying put. While stakeholder pensions cannot have exit penalties, many existing pension contracts do. Early termination penalties can take a heavy toll and the threat of misbuying is real.
Employee opinion is also important. It is likely that many employers will choose a scheme and not contribute. The result of this is that few employees will join and the whole exercise may turn out to be an expensive waste of time. In the past, pension provision has been a difficult message to deliver and there is no reason to suggest that stakeholder will change this pensions need to be sold.
An employer contribution and a compulsory amount of employee contribution is vital if a pension scheme is to be effective, otherwise employee opinion will be poor. However, many millions are simply too hard up to contribute particularly those in the Government's target audience. Solving this problem first may have been more sensible.
So why should an employer consider a group personal pension as an alternative if it turns out to have higher charges and requires the employer to pay 3% of each employees basic earnings?
Let us consider why the Government has allowed these schemes to act as exemption vehicles. The idea is the 3% contribution will go some way to offset the higher charges that may exist under the group personal pension contract. Most group personal pensions on offer have a 1% charge, and only ever slightly more than that to cover the cost of commissions for advice. Many would argue that factoring in the cost of advice up to 1.5% is justifiable and is how stakeholder should have been modelled in the first place. In addition, the group personal pension must mirror stakeholder in that it cannot have exit penalties, which is good news for employees.
Other reasons for considering a group personal pension include:
l A simple alternative where an adviser is taking on the responsibility for the employer.
l Simplified contribution collection where the employer is in the driving seat and there is none of this paying when you like.
l Membership control the employer can ask the employees to match the company contribution (up to 3%) and impose a maximum three-month waiting period. This might sift out temporary workers and low-paid workers for whom membership might not be a good idea according to the Government.
l Face-to-face advice for the employees, regular reviews of the scheme, and advice on non-pensions related matters such as mortgages, investments and protection.
l Although not high on the list of priorities for the average employee, perhaps wider investment options than a standard stakeholder provider can afford and the mystical with-profits option for those employees who want it.
However you look at it, an employer running a group personal pension on this basis is providing a funded pension scheme and it has to be good news. The alternative may been an unfunded stakeholder scheme and in these circumstances, there is no argument the group pension plan wins.
There is however a narrow-minded but growing view that everything that is not stakeholder is no good. It seems that some cannot look beyond the 1% charge. The Government's key objective is to get a larger proportion of the population into employer-funded pension schemes without, one would guess, the need for vote-killing compulsion. To think that stakeholder is the best and only solution is na•ve. Given the facts, many employers prefer the group personal pension option and should be encouraged to follow this path.
Tim Gosden is pensions development manager at MGM Assurance
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