The stakeholder pension story began when Labour were still in opposition. They observed that persona...
The stakeholder pension story began when Labour were still in opposition. They observed that personal pensions were not suitable for everyone. People who could only afford low or irregular contributions were not well served by the personal pension charging structures which were then prevalent. The concept of stakeholding was in vogue a few years ago. It was very New Labour to be inclusive, so that everyone should have a chance not only to participate but to have an input into the decision-making.
Hence the concept of stakeholder pensions was born, not only as a low cost vehicle which would give good value to everybody, but as one where everyone would have a say. In the face of reality, this noble democratic principle has quietly disappeared.
But stakeholder pension cannot be viewed in isolation. It must be seen as part of this government's overall pension strategy. Frank Field was appointed Minister for Welfare Reform in May 1997 to "think the unthinkable".
It is widely believed that when he brought his ideas back to Cabinet the unthinkable was promptly unthunk, because he advocated an increased level of compulsory pension contributions. Reports suggest that Gordon Brown vetoed this increased compulsion on the grounds that it would be interpreted by the voters as a backdoor tax. This is not to say that Gordon Brown dislikes backdoor taxes, consider, for example, the £5bn he raises each year through taxing the investment returns of pension funds, but we understand his prime objection was that people would notice.
Thus the concept of stakeholder pension had to be launched on a voluntary basis, and many of us feel that it was the withdrawal of the lynch pin of compulsion which has left us with the difficulties which the Government is trying to pretend do not exist. For example, in the booklet entitled stakeholder pensions a guide for employers (it is of course very trendy not to use capitals) there is a revealing passage on page 9.
"You can give your employees help and extra information about the benefits of saving for their retirement. But, you must not advise your employees. Every individual must make up their own mind about the best way to save for retirement".
The passage goes on to say that the FSA strictly controls who can give financial advice and refers to further booklets from the DSS.
But nowhere does it say that pensions are complex, that this Government is making them ever more complex and that most people really ought to take professional advice before deciding.
Decision trees are a help for those who choose to use them, but they are not advice and they are not comprehensive.
Another central plank of the Government's pension policy has been to concentrate resources on the poorest of today's pensioners. This has been done by renaming means-tested income support in old age. It is now minimum income guarantee (MIG) giving it a step jump, with another step jump to come soon, and indexing it to earnings, not prices.
These are admirable improvements for some of the most needy and vulnerable members of society and I applaud them.
But they do have unfortunate knock-on effects for stakeholder pensions. For low earners, and never forget that employers who have at least five employees must offer stakeholder to people earning £68 a week if they aren't being offered something else, there is a savings trap.
If they pay in to stakeholder but qualify for MIG when they retire, on current rules the money they paid in is wasted. The Government has addressed this problem by proposing a pension credit, not to be confused with the same term used in the context of pension sharing on divorce.
This pension credit will recognise and reward the private saving for retirement made by low earners.
However, there are two problems with this pension credit which affect stakeholder pensions. The first is that it will not be a pound for pound recognition, so for many low earners it may well be better advice to pay the same money in to an Isa, where it is available for a rainy day or can count against the MIG capital offsets.
The second problem is one of timing. Legislation for this pension credit will not come this side of the general election, but stakeholder pensions go on sale, without individual advice for the vast majority, in April 2001.
A statement from the FSA on this timing problem is eagerly awaited.
The effect that stakeholder pensions are having on the pensions market is already dramatic, and stems almost entirely from the charge cap being set at 1%pa of funds under management. This means that every employer or individual considering a money purchase pension plan which has charges exceeding this 1% is likely to ask "what is it about this pension plan which makes it worthwhile for me to pay charges higher than the stakeholder alternative?"
There are many potential positive responses to this question.
For example individual advice can be provided much more straightforwardly and cost-effectively outside stakeholder than within it. There are likely to be much greater options outside stakeholder, for example external fund links and full-blooded with profits.
Employers can better minimise red tape over payroll deductions, and disruption of workplace access, outside stakeholder than within. Products other than stakeholder can be set up now, ahead of the mad stampede for compliance which most small employers will face in the six months between April and October 2001.
There are already commentators in the press who are suggesting the selling of group personal pensions (GPPs) instead of stakeholder is being done for commission purposes.
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