A stake in the future
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25 November 2013
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1 July 2013
The idea behind stakeholder schemes was a good one - give low earners a vehicle in which they can save safely and at a low cost through their employer, with all contributions deducted at payroll.
Like all good ideas, it is great in theory, but although stakeholder schemes do not come into force until October, it has already received heavy criticism for missing its target audience.
The charges for stakeholder schemes are capped at 1 per cent and regulations say that the minimum contribution can be set at no higher than £20 a month. Many consultants have voiced concerns that paying in contributions at this level is pointless and could lead to employers becoming embroiled in a misselling scandal similar to that of the 1980s.
Harvey Brown, chief actuary at human resource consultancy William M Mercer, feels that the original target audience is unlikely to take up stakeholder pensions. "They do not have the money to pay into a pension plan in the first place, and the government is concerned about this," he says.
Fears of another misselling scandal mean that the Government has been back-pedalling fairly swiftly on the issue. Brown says: "There is a recognition that misselling simply means relieving the Government of its responsibilities [to provide pensions for poorer pensioners]. Now it is recognising the importance of saving for those on the borderline."
The new target audience is more likely to be the middleincome earners - those earning between £20,000 and £30,000.
Last year, the Government announced that it will allow concurrent membership of a stakeholder pension and an occupational scheme. This could mean that many employees earning within this bracket may look to stakeholder as an alternative to additional voluntary contributions (AVCs).
While higher earners initially thought stakeholder was a poor man's pension, they may well now take advantage of the attractive tax breaks on offer.
All those earning less than £30,000 a year will be able to take membership of a stakeholder plan as well as their occupational scheme, as long as they have not been a controlling director within the past five tax years. They can use the stakeholder scheme as an additional savings vehicle to pay in up to £3,600 a year extra tax-free.
Some of the benefits include the opportunity to draw 25 per cent of the cash from a stakeholder at the age of 50, while still working, and the fact that the tax savings of a stakeholder do not count towards Inland Revenue limits, whereas those under AVCs do.
This is not likely to have the same effect in a law firm as it might, for example, in a marketing company. Although there has been talk of scrapping the £30,000 cap, there are no definite plans to do so. Perhaps only younger employees within law firms will have the opportunity to take advantage of the benefits of a stakeholder pension.
John Holland, research director for benefits consultant Entegria, says: "I think that we will see a lot of stakeholder plans as alternatives to AVCs. It is likely to make stakeholder far more widespread than it might have been." However, Holland points out that partners are likely to have a personal pension anyway. For those beneath the £30,000 limit, the question, according to Holland, will be: "Is it a better alternative to the personal pension?"
He says: "Stakeholder pensions have much more flexibility about when you retire and how much you can take. You can phase into retirement a lot more easily and they are more portable than occupational schemes." However, Holland feels that the main benefit will be the lower charging structure.
This has its pros and cons. "The provider is restricted on charges, so the theory is that investment choice will be limited," Holland continues. "However, a lot of providers are coming onto the market who are offering a wide investment choice."
Stakeholder providers will probably be extremely keen to snatch up this area of the market and may be prepared to look at extending investment choice. A 1 per cent charge will not bring in much money from low earners, particularly in the first years of a fund, but for a higher earner using the fund as an AVC vehicle for at least five years, the charges suddenly look much higher. "High earners need to be quite wary and look for providers who are willing to put a cap on the charges," says Holland.
Slaughter and May has just introduced a new defined contribution pension scheme which is in line with stakeholder require-ments and will start in April. But Slaughter and May personnel director Neil Morgan is not sure that employees will want to make the most of the benefits of stakeholder. He feels concurrency has been overhyped, and the fact of having to make a decision and a change will be enough to put most people off. "I just don't think people will be of the mindset 'I must get a stakeholder in place of an AVC'. The firm probably already makes a contribution to their pension and they will make additional voluntary contributions through that."
However, he concedes that earners at the top end of the £30,000 cap might be tempted if they know it will cost them less.
But will employers take up the opportunity to provide these schemes if they are under no obligation to do so and are already making contributions to an occupational scheme?
Allen & Overy has an occupational scheme which it is thinking of registering as stakeholder compliant. Like most law firms, Allen & Overy has only a handful of support staff who are young low earners and therefore considered to be relevant employees under stakeholder.
"We only have about 10 people under 21," says Kerrie Rowland, benefits manager at Allen & Overy. "It doesn't seem worth buying a stakeholder product. We are waiting to find out whether it will be necessary. We may have to offer a stakeholder scheme as well."
One of the factors behind this consideration is whether the stakeholder scheme will be used by "non-relevant" employees as well. A "relevant" employee is a person who is older than 18, has been employed for more than three months and earns more than the National Insurance low earnings limit. Rowland believes that it is possible that stakeholder will be used by non-relevant employees. "We think our AVCs are already pretty well-used, although people are not maximising the 15 per cent maximum allowed by the Inland Revenue. Most put in less than 5 per cent," he says.
As Rowland points out, the partnership set-up does not see most employees through to retirement, and at the age of 35 or 40, many get a personal pension instead.
Allen & Overy's employees are younger than most, and it is the support staff and junior lawyers who are in the best position to take advantage of stakeholder pensions. But Rowland doubts that there would be a large take-up on such an offer, even if it was marketed internally. "People still think they are going to be offered some kind of state benefit and there is a heavy reliance on them," he says. "There is just no real belief that there will be nothing."
The most important outcome of the whole stakeholder debacle is likely to be that, even if lower paid workers do not invest in them, there will be a general increase in pensions awareness.
The Government's stakeholder awareness campaign will begin early this year. It is expected to include television advertising in order to get across the message that this is not just a work issue and not something that can be avoided. As well as being an educational experience for the general public, many consultants feel that employers will be forced to rethink their current arrangements as well.
Hammond Suddards Edge pensions solicitor Sasha Butterworth says: "Many employers will use stakeholder as an opportunity to look at the rest of their benefits package."
Lawrence Collins, of internal marketing consultant Synergy, agrees: "The Government's campaign will be a general awareness campaign. Employers will be able to use this to promote their own schemes and it is an opportunity for them to ask themselves whether they have everyone included in the scheme who should be."