It is sometimes difficult to believe stakeholder pensions are still in the pre-launch phase as it se...
It is sometimes difficult to believe stakeholder pensions are still in the pre-launch phase as it seems as though the pensions industry has been talking about little else for over two years now. It is also hard to think of any other product that has exerted such a profound influence before it has even been launched and created so many myths.
Probably the most fundamental myth is the belief that stakeholder is a new and totally different type of pension, when in reality it is certainly not.
It is true that the DSS has laid down some very specific requirements for stakeholder pensions in relation to charges, member information and employer responsibilities. But, in terms of governing legislation, stakeholder is, in fact, a form of personal pension. The Inland Revenue rules governing eligibility, contributions and benefits are the same for all new defined contribution regime products, be they stakeholder, personal pensions or any money purchase schemes that choose to take that route.
Aside from the technical considerations of what exactly stakeholder is, there are a number of other myths that have rather more practical implications.
Group person pensions
First, there is the idea that a group personal pension (GPP) already in place will somehow transform itself and suddenly become a stakeholder plan on 6 April.
But even where the GPP in question happens to have the same charging structure as stakeholder, it is not simply a case of moving seamlessly from one to the other.
In joining the GPP, the members have each individually taken out personal pension contracts. If they want to move from one pension to another, a transfer of their benefits would have to be arranged, which would apply even when moving from a GPP to a stakeholder scheme with the same provider. Dependent on the structure and features of the GPP, it may certainly be possible to arrange for members to transfer without any penalty, but any transfer will be bound to involve some administration at the very least.
For example members would need to complete the necessary forms to transfer their benefits and become members of the alternative stakeholder scheme.
And if the members and the employer are happy with the charging structure and features of the existing GPP, it rather begs the question, why move to stakeholder?
Another area of misconception surrounding stakeholder relates to employer exemptions.There is a belief that for a GPP to be capable of providing exemption for the sponsoring employer, the charges must be no more than the 1% maximum that applies to stakeholder. This is simply not true.
An employer who offers a GPP to its employees will be exempt from the requirement to offer stakeholder if certain criteria are met. Most of these criteria actually relate to the eligibility conditions and level of employer contribution rather than to the structure of the GPP.
A charging structure in excess of 1% will not invalidate the exemption providing the other criteria are met. And there may be perfectly good reasons why the GPP has a charge of higher than 1%. For example, the GPP may offer some features that are not available under stakeholder, or it may offer an enhanced range of funds. Alternatively, it may be that the members and employer want to allow full, personalised advice to be available and prefer to pay for this via the GPP charges rather than separately by way of fees. In this area, therefore, customers can choose and do not have to go for a 1% charge.
The most worrying myths about stakeholder pensions probably relate to the crucial area of employer responsibilities. It is hardly surprising that there should be some confusion, since the requirement for employers to offer access is new and, particularly for many small to medium-sized employers, will mean they will have to be involved in employee pension provision for the first time.
Mandatory employer access becomes law on 8 October 2001, in almost seven months' time. Recently there have been a number of press surveys that indicate that many small to medium-sized employers are either:
l Unaware of the new responsibilities they will face
l Complacent about what those responsibilities entail.
For instance, recent surveys have indicated that many of the employers in this category intend to do nothing about stakeholder. This is one myth that really must be exploded as soon as possible. We need to be clear on this, because for employers with five or more employees, doing nothing is simply not an option.
At the very least, they will have to check to ensure they either have no relevant employees to whom they must offer stakeholder or that they have in place an appropriate alternative pensions offering for all employees covered by the legislation.
Talking of relevant employees and alternative pension offerings leads us neatly into considering two very specific misconceptions that are frequently raised in conversation. The first is that contract employees do not count for stakeholder. Like so many other pensions issues, it is not that simple. It depends on the nature of the contract.
If we take it right back to basics, what do we have to establish? The employer has to identify their genuine employees. This sounds like stating the obvious and in many cases will be both simple and straightforward. But there may be times when things become more complex. For example, are there any people involved with the business who are not employees, but are self-employed, perhaps on a consultancy basis?
Or there may be different types of contract workers. If there are contract workers in the organisation who are supplied by an agency, and the employer pays a fee to the agency for their services, then they are not employees and do not have to be offered stakeholder, though the employer could do so if it so wished. However, they will be employees of the agency and the agency will have to offer them access to stakeholder.
But if the contract workers are directly employed, with the employer paying their salaries and taking responsibility for tax and national insurance deductions, then they are bona fide employees and will have to be offered access to stakeholder once they have been continuously employed for three months. And that would include people who are employed on three-month contracts that are rolled over.
Ignorance is not bliss
The other common misconception appears to be that employers who already offer schemes can sit back, relax and ignore stakeholder since it will not affect them. This is an extremely dangerous belief since it is very likely to be wrong.
Any scheme, whether occupational or GPP, must meet the necessary criteria if the employer is to be exempt.
Let us take just one example, the requirement to offer pension provision to employees aged 18 and over. Even some big occupational schemes run by large employers exclude employees who are under 21. Indeed, the NAPF survey for 2000 tells us that over a quarter of schemes have an entry age over 18.
In addition, we must remember that it will be principally small to medium sized employers who will be facing new responsibilities from October. Most surveys of pension provision among employers in this group indicate that, even where they do offer pension schemes, eligibility tends to be restricted to certain categories of employees. The reality is that the majority of employers in this category are likely to have to make some changes to the pension provision they currently offer.
These are not harmless misunderstandings they are important issues that employers and their advisers will have to resolve in the run up to October. And since, along with death and taxes, employer responsibilities for pension provision are now a certainty, it makes sense to consider these issues and make the necessary changes sooner rather than later.
There is one other potential misconception we must dispel before we finish. Even before its launch stakeholder has exerted a great deal of influence on the whole pensions industry. It is impossible to predict with any certainty what the take-up of stakeholder will be. But one thing is clear in the future, stakeholder will not be the only game in town.
Occupational and personal pensions will continue and stakeholder will take its place alongside these existing contracts as part of the range of pension options available.
Margaret Craig is pensions development manager at Scottish Equitable
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