Skip Navigation LinksHome > News > 1999 > October 1999 > Stakeholder Pensions - Overall Position and Timetable

Stakeholder Pensions - Overall Position and Timetable

Timetable

The UK Government has issued 6 consultation papers during the summer of 1999 on various aspects of Stakeholder Pensions.

The UK Government state that they are considering very carefully submissions in response to these papers. They expect to issue draft regulations and legislation at the end of 1999. These will then be subject to further comment. The proposals would be enacted by Welfare Reform and Pensions legislation in 2000 with the tax regulations in the Finance Bill 2000.

The target date for the commencement of Stakeholder Pensions is April 2001.

The Government is trying to address substantial problems with Stakeholder Pensions for those with inadequate pension savings. This was never going to be easy. We welcome the fact that the consultation process appears to be a genuine one with the Government prepared to listen.

Background To Consultation

In December 1998 the Secretary of State for Social Security published a Green Paper "A new contract for welfare: Partnership In Pensions" setting out framework for Stakeholder Pensions. This is being taken forward in the Welfare Reform and Pensions Bill currently before Parliament. Consultation papers issued from the DSS this summer have been:

  • Minimum standards (issued 2nd June).
  • Employer access (issued 29th June).
  • Clearing arrangements (issued 12th July).
  • Regulation, advice and information (issued 2nd August).
  • Governance (issued 2nd August).
  • The tax regime (issued 16th September).

The main points of these six consultation papers is given below in listed form, with brief comment at the end.

1. Minimum Standards For Stakeholder Pension Scheme

Charges

  • A single percentage charge on the value of the fund, to cover all normal operating costs.
  • The total charge to be limited to 1 per cent per annum.
  • Charges to include costs of basic explanation and advice, subject to later consultation.
  • Any additional services to be paid for separately, but must be discretionary.

Minimum contributions

  • Should be no higher than £10, either for regular or one-off contributions.
  • No minimum frequency of contributions should be specified.

Investment

  • There should be a clearly defined default investment choice (to be determined by trustees).
  • With profits investments should allocate all funds to scheme members.

Information

  • Requirements as for other money purchase pension schemes.

Transfers

  • There should be no additional charges for transfers into or out of Stakeholder Pensions.
  • Schemes must accept transfers of pension rights from other schemes, insofar as this is consistent with the requirements for tax approval.

Tax approval

The maximum charging structure has been the subject of intense debate, especially the adequacy of charges for low levels of contributions. The maximum charge of 1 per cent per annum is likely to be increased to 1.5 per cent. The structure remains theoretically flawed: in the long term a charge relating to fund size will increase in real terms. This is acknowledged by the UK Government but it concludes that it is the least bad method. The emphasis on simplicity and transparency is welcome. The charge is expected to cover basic advice. The UK Government has concerns about the appropriateness of traditional with profits funds.

2. Employer Access Requirement For Stakeholder Pensions:

  • All employees earning above the NI lower earnings limit will have access to a Stakeholder Pension if no occupational scheme is offered.
  • Group personal pensions which meet certain standards could also exempt employers.
  • Employees must be able to join an occupational scheme within six months of starting work in order for the employer to be exempt.
  • Individuals may be limited to changes in contributions through payroll at three month intervals to keep down costs to employers.
  • The Government may allow a year from the introduction of Stakeholder Pensions for employers to make arrangements, before the requirements come into force.

This is an important part of the consultation for employers. The one year breathing space is welcome. The maximum six month waiting period is tight and many occupational Schemes would need new eligibility rules to qualify for an exemption. Many questions remain unanswered in the paper - for example Group Personal Pension exemption criteria, employer consultation with employees and employer liability for investment performance of Schemes.

3. Clearing Arrangements For Stakeholder Pensions

  • The Government's aim is that there should be a simple and cost-effective mechanism for employers to pass contributions to Stakeholder Pensions onto providers. As employers require clearing arrangements for Stakeholder Pension payments they should look to use current commercial clearing facilities, available through the commercial banks, bureaux and BACs.
  • The option for a separate dedicated clearing house for Stakeholder Pensions should not be developed further at this stage.

The paper sets out at length the relative merits of a separate clearing house for Stakeholder Pensions. It concludes that this would be an unnecessary layer of bureaucracy. It defends this conclusion on the grounds that the minimum requirement to employers is only to offer a single Stakeholder Scheme. It hopes the Schemes themselves will develop payroll software support to assist employers. This conclusion is a change from the Green Paper which envisaged a separate clearing house.

4. Regulation, Advice And Information For Stakeholder Pensions

Regulation

  • The Occupational Pensions Regulatory Authority will regulate the operation of Stakeholder Pensions, including their compliance with the registration requirements.
  • The Financial Services Authority will regulate the marketing of schemes and the provision of advice. It will consult in due course on the rules which might apply in the marketing of Stakeholder Pensions.
  • The regulation of schemes set up under any alternative governance structure that may be approved will be determined as part of the development of proposals for an alternative.

Advice and information

  • Within the overall scheme charge, Stakeholder Pensions must as a minimum provide such information as is required in line with normal rules on investments - and would typically supply details of key features; projections of potential benefits; a "decision tree"; assistance in interpreting the information, and generic advice.
  • Views are invited by the UK Government on whether, and if so how, schemes should also be required to provide advice other than that specified in regulations as being outside the scope of the overall scheme charge - eg on non-pensions issues. The aim would be to enable the generality of scheme members to decide whether to join the scheme, and on what terms, within the overall scheme charge limit.
  • Any charges for advice outside the overall scheme charge limit would be expressed in terms of a fee, which should be clearly disclosed.
  • There will be a 14-day cooling-off period for anyone joining a Stakeholder Pensions.

The debate about advice and information is part of a wider debate on personal financial education and awareness. It is not clear how a prospective member will know whether that basic advice is sufficient. The decision trees are full of difficulties. Nonetheless the aims and basic proposals are constructive, and it must be recognised that the UK Government is tying to overcome a tremendously onerous problem of pensions education and poor advice.

5. Scheme Governance

Trust-based schemes

  • Views are invited on whether a proportion of trustees should be independent of service providers to the scheme.
  • There are no specific requirements on member-nominated trustees or appointment of professional trustees.
  • Trustees will be free to contract with service providers for such periods as they see fit.
  • There will be no prohibition on payment of trustees.
  • Views are invited on whether schemes should be wound up in the event that they lose their stakeholder pension status.
  • Trustees should be responsible, under the terms of the trust deed, for ensuring the scheme does not breach the conditions for registration as a Stakeholder Pension.
  • Schemes will be able to restrict membership to specific groups.

Secure stakeholder management

  • Proposals for "secure stakeholder management", to provide an alternative to the trust-based model of stakeholder schemes.
  • Schemes would be run by an authorised stakeholder manager, who would be responsible for ensuring compliance with minimum standards and would take on a number of the other duties of trustees in trust-based schemes.
  • Members' rights in schemes would be set out in contracts.
  • Stakeholder manager should report to members on scheme performance, compared with certain benchmarks.
  • Optional advisory committee to represent scheme members' interests.

There are many problems with this paper. The choice of different governance structures adds complexity. The terminology of 'Secure Stakeholder Management' is unfortunate because it may imply to a layman that trustee governance is insecure. The method of remuneration and selection of trustees is not clear. Personal liability for excess expenses over this minimum charge is difficult. The duties of trustees still need clarification - in particular the delivery of benefits on and after retirement. Professional trustees may have a greater role than envisaged in the paper.

6. The Tax Regime

  • Contributions will be allowed into a Stakeholder Pension in excess of £3,600 per tax year by reference to the existing personal pension age and earnings related limits.
  • No link with earnings will be required for Stakeholder Pension contributions up to £3,600 per tax year.
  • All contributions from individuals into Stakeholder Pensions should be paid to the provider net of basic rate tax with the pension provider reclaiming the basic rate tax from the Inland Revenue.
  • The tax regime for Stakeholder Pensions should be extended to personal pensions and, if the trustees wish, occupational money purchase regime.
  • Contributions above £3,600 could continue for five years after the year in which earnings cease. The upper limit would be the highest relief available in the year of cessation of earnings or the two immediately preceding years. After the five years, contributions would be limited to £3,600 each year.
  • Abolish the carry forward/carry back provisions for personal pensions - probably from April 2001.
  • Views are specifically invited on whether premiums for additional benefits such as life assurance should be allowed within this proposed tax regime for defined contribution pension schemes, and if so, bearing in mind the absence of an earnings link in many cases, how limits should be set.
  • To obtain tax approval, schemes would have to submit a standard application and adopt model rules.
  • Concurrent membership of defined contribution schemes and defined benefit occupational schemes will not generally be permitted. Concurrency with other defined contribution arrangements generally will be permitted.
  • Wherever possible, the current arrangements for transfers between the various sorts of pensions schemes should be adopted.

The allowance of up to £3,600 per annum contributions regardless of earnings has caught the headlines. It is indeed an imaginative proposal, but the effect in practice may be less than the exaggerated claims. The emphasis on simplicity is welcome. The Different rules on concurrency between types of other pension schemes is understandable but unwelcome, unfair and inappropriate nonetheless. The proposal to drop carry forward/carry back is unfortunate and will disappoint the self-employed in particular.

Colin Richardson, October 1999.