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Stakeholder Pensions - Summary of The Draft Regulations

1. Scheme Governance

Schemes can be set up as trust-based schemes or as contract-based schemes with an authorised scheme manager;
All schemes must provide a default investment option, for members who do not wish to choose how their funds are invested;
In trust-based schemes, one-third of trustees must be independent of the organisations who provide services to the scheme, whilst contract-based schemes will be authorised by the Financial Services Authority;
Trust-based schemes can restrict membership with reference to employment type, but not on financial status. Contract-based schemes must be open to all;
Detailed provisions will apply on winding up stakeholder schemes to safeguard members' rights.
Stakeholder schemes must maintain a statement of investment principles and take into account the need for diversification when investing scheme funds; and
Stakeholder schemes must appoint a scheme auditor.

Overall charging cap in the form of a 1 per cent annual management charge, covering all aspects of the management of the scheme and its funds, subject to certain specified exemptions;
Additional advice or services may be provided at additional cost, subject to a separate contract. It must not be a condition of scheme membership;
Costs resulting from transactions in the underlying assets are additional to the 1 per cent charge;
'With-Profits' policies may be offered within the 1 per cent charge and must be 'ring-fenced', so that all money goes back to the members; and
Daily valuation of funds will be required.

Schemes can set a minimum level of contribution but this cannot be more than £20 and the maximum contribution, before having to make a declaration of earnings, will be £3,600 per tax year;
Contributions of £20 or more must be accepted, whether regular or 'one-off';
Contributions arising from contracting-out of the State Earnings-Related Pension Scheme ("SERPS") must be accepted, even where lower than £20; and
Schemes cannot demand that contributions are made in a certain way, such as via the Internet.

Existing contracting-out rebates will apply for the tax year 2001/02; and
The Government Actuary's Department will review future rebates before the 'State Second Pension' replaces SERPS.

Duty on employers to facilitate access to stakeholder schemes comes into force from October 2001;
Employers need not provide access for any employee:
Where less than 5 employees are employed;
Who can join an occupational pension scheme within 12 months of starting work;
Who is under the age of 18 (or within 5 years of normal pension age under the pension scheme);
Where the employer is prepared to make a contribution to a chosen Group Personal Pension ("GPP") of at least 3% of basic pay, (this may be made conditional if matching employee contributions also of no more than 3%) and contributions are deducted via payroll. In addition, GPPs must not impose explicit charges or penalties if a member decides to leave the scheme or stops paying into it;
If employer not exempt, stakeholder access must be offered to employees within 3 months of starting work; and
Employees may be prevented from amending the rate at which deductions are made through payroll more frequently than six-monthly. An employee may cancel payroll deductions at any time.

A detailed statement setting out information on contributions, investment performance and charges must be provided at least annually to members;
The statement must also show the fund value at the start and end of the period and include a full transaction history, including any transfers-in and tax reclaimed; and
'With-Profits Fund' members must be given comprehensible information on the Fund's operation and how the member's rights are determined.

The Occupational Pensions Regulatory Authority ("OPRA") will regulate the operation of stakeholder pensions, including compliance with the registration requirements;
The Financial Services Authority will regulate the marketing of schemes, the provision of advice and will also authorise contract-based schemes;
Draft Finance Bill clauses regarding taxation were issued on 22 February 2000. The Inland Revenue will issue draft regulations later this month.
It is intended that performance comparisons made against a sector benchmark of the performance of the middle 60 per cent of funds, must be provided annually to members; and
OPRA will be given powers to calculate and communicate the benchmark information.

Barnett Waddingham, April 2000.