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Stakeholder Pensions - Detailed Summary

Introduction

"The Stakeholder Pension Schemes Regulations 2000" were laid before Parliament on 25 May 2000. Falling under the Welfare Reform and Pensions Act 1999, these regulations describe the establishment and operation of stakeholder schemes. A detailed summary of the regulations is set out below.

Part I - General

This part sets out the definitions of terms used within the regulations and the commencement date of the various parts of the regulations.

Regulation 1 - Commencement date

  • Parts I to III and Part V of the regulations will come into force with effect from 1 October 2000, in order to allow stakeholder schemes to register in preparation for accepting the first contributions from 6 April 2001.
  • Part IV will come into effect from 8 October 2001, giving employers six months after the introduction of stakeholder schemes to comply with the requirements.

Part II - Conditions applying to Stakeholder Pension Schemes

Out of a total of 32 regulations, regulations 2 to 19 inclusive sets out in detail the various conditions which need to be fulfilled in order for a stakeholder scheme to be established.

Regulation 2 - Manner of establishment

  • Stakeholder schemes can be established under trust or may be established by a contract between a suitably authorised organisation ("a scheme manager") and an individual ("a scheme member"), or a person acting on his behalf.
  • More than one contract can be effected between a scheme manager and an individual.

Regulation 3 - Requirements applying to all stakeholder schemes

  • No contributions to stakeholder schemes can be accepted before 6 April 2001.
  • Stakeholder schemes must provide members with a "default" investment option. Therefore, members do not have to exercise any choice over investments if they do not wish to do so.
  • With the exception of charges - contributions, investment growth and the value of a member's rights within the stakeholder scheme must be wholly used in the ultimate provision of benefits for and in respect of that member.
  • Where a stakeholder scheme is being wound up, the winding up procedure should ideally not take longer than a year. The trustees or scheme manager should notify in writing any employers whom they know to have designated the scheme for its employees of the fact of, and the reason for, the winding-up. The cash equivalent of each member's rights within the stakeholder scheme must be transferred either to another stakeholder scheme or, at the request of the member, to an alternative pension arrangement.

Regulation 4 - Additional requirements for trust based stakeholder schemes

  • Trust based stakeholder schemes must not restrict membership by reference to the member's financial status or require members to make an agreement as to the contributions they will make, or the manner in which those contributions will be made.
  • Trust based schemes will, however, be able to restrict membership by reference to employment with a particular employer or in a particular trade. This will allow schemes to cater exclusively for members of a particular trade union or affinity group.
  • At least one third of the trustees must be independent from the providers of services to that stakeholder scheme or the scheme managers. A similar requirement applies to the directors of any company, which acts as a trustee.

Regulation 5 - Additional requirements for non-trust based stakeholder schemes

  • Non-trust based schemes will not be able to restrict membership, by reference to employment with a particular employer or in a particular trade, profession or organisation.
  • Trust based and non-trust based stakeholder schemes can, however, prohibit contributions being made either by cash or by credit card.

Regulation 6 - Discharging rights on winding-up a stakeholder scheme

  • This regulation sets out the procedure to be followed on the wind-up of a stakeholder scheme and the transfer of member's rights. The principal aims are to safeguard the rights of members and ensure they are transferred promptly to another suitable scheme.
  • Within four months of commencing to wind up a stakeholder scheme, the trustees or scheme managers must write to members informing them where their rights under the scheme are to be transferred unless they decide otherwise, and giving details of their accrued rights at the valuation date.
  • If a member applies to have his rights transferred to another approved pension scheme, the trustees or scheme managers must, unless for whatever reason the transfer is not permissible, take the necessary steps to arrange this.
  • Where the trustees or managers do not receive any application from a member, they can make a transfer payment in respect of that member's rights to the stakeholder scheme notified to the member, without the member's consent
  • Within one month of making a transfer payment, the trustees or scheme managers must write to members, advising them of the amount of the payment, the name and address of the scheme to which the payment was made and the date on which the payment was made.

Regulation 7 - Discharging rights where contact with the member is lost

  • Where a stakeholder member's current address is not known by the trustees or scheme manager and no contributions have been made by that member during the two year period prior to commencement of winding up the stakeholder scheme, the trustees or scheme managers can make a transfer payment to a stakeholder scheme of their choice in respect of that member's rights and need give no notice of the transfer payment to the member, either before or after it is made.

Regulation 8 - Investment requirements for stakeholder schemes

  • The trustees or manager of a stakeholder scheme must ensure at all times that any of the funds of the scheme that are held on deposit secure an interest rate that is, net of any fees or charges, not lower than 2 per cent below the bank base rate.
  • If the trustees or managers of a stakeholder scheme decide to invest the scheme assets in "collective investment schemes" (that is, unit trusts, investment trusts, etc) or pension fund management contracts of insurance companies, they will only be able to do so if these investment schemes/contracts do not possess a "bid/offer spread" within their charging structure (that is, where there are different buying and selling prices of units).

Regulation 9 - Statement of Investment Principles for non-trust based schemes

  • For stakeholder schemes not established under trust, the scheme manager is required to maintain a "Statement of Investment Principles" at all times, which should include the scheme manager's policy concerning, for example, the kinds of investments held, the balance between the different kinds of investment and risk. It also requires disclosure of how far social, environmental and ethical considerations are taken into account and the policy towards voting rights.
  • A copy of the current Statement of Investment Principles should be provided by the scheme manager, upon request by a member of the stakeholder scheme, within two months of the request being made. Note that these requirements already apply to trust based schemes.

Regulation 10 - Investment matters for non-trust based schemes

  • For stakeholder schemes which are not established under trust, although it is not proposed to place any direct limitation on the types of investment which stakeholder schemes may use, this regulation requires the scheme managers to have due regard to the need for diversification and the suitability of investments.
  • These requirements mirror similar provisions under the Pensions Act 1995, which already apply to all occupational pension schemes (these provisions will also apply to trust based stakeholder schemes).
  • Where the scheme manager is not suitably qualified, "proper advice" must be obtained, regarding the type of investments entered into with the stakeholder scheme assets.
  • The selection of investments should be consistent with the provisions outlined in the Statement of Investment Principles for the scheme.
  • The reasons for using any particular type of investment, where decided by the scheme managers themselves or by a suitably qualified third party, must be recorded in writing.

Regulation 11 - Requirement for non-trust based schemes to have a "reporting accountant"

  • For stakeholder schemes not established under trust, the managers of such schemes must appoint a "reporting accountant" in order to audit the scheme.
  • The specific terms of the reporting accountant's appointment are set out in detail and mirror existing Pensions Act 1995 requirements that are already in place for trust based schemes.
  • The reporting accountant has to acknowledge his appointment in writing and also confirm in writing any conflicts of interest that may arise in the future.
  • If the reporting accountant resigns, the resignation must be confirmed in writing and the scheme managers must then appoint another reporting accountant within three months of the date of resignation (or removal or death).

Regulation 12 - Requirement for annual declaration of compliance

  • At least once a year, the trustees or manager of a stakeholder scheme need to make a "written declaration" confirming that, for a previous specified twelve month period, the overriding stakeholder scheme charging structure has been adhered to, that asset transactions occur at a fair market value, that the methods used to determine the value of the member's rights are sound and that adequate accounts and records have been maintained for the scheme.
  • The statements contained within this declaration must, within 3 months, be endorsed, either by the scheme auditor or reporting accountant.
  • The trustees or scheme managers must make this declaration available, on request, to members and beneficiaries of the stakeholder scheme.

Regulation 13 - Expenses, commission etc - principles

  • All contributions to the stakeholder scheme and investment returns secured should be used to provide benefits for scheme members, except where permitted under regulation 14, which sets out allowable deductions from member's funds.

Regulation 14 - Permitted charges

  • In general, all stakeholder schemes should only be allowed to levy daily charges of no more than an equivalent annual rate of 1 per cent of the value of funds held in the scheme.
  • This charge should cover all normal costs associated with membership of the scheme and applies to all stakeholder schemes.
  • This regulation also sets out the circumstances in which additional charges can be made on the value of a member's fund, including;
  • a) To cover the costs of providing an annuity, or for operating an income drawdown arrangement;
  • b) For costs in administering pension debits arising from sharing pensions, or obligations arising from certain court orders;
  • c) For the administrative cost incurred in returning excess contributions made in relation to the member; and
  • d) Where any stamp duty or related charges are incurred, in the sale or purchase of securities or property held for the stakeholder scheme.

Regulation 15 - Requirements for with-profits investments

  • Where a stakeholder scheme invests in a "with-profits fund", that fund must not include any non-stakeholder scheme assets.
  • Prior to investing in the with-profits fund of an insurance company, the stakeholder trustees or manager must enter into a written contract with that insurance company.
  • The contract will confirm, amongst other things, that members of the stakeholder scheme will not be treated less favourably than any other members of stakeholder schemes who have assets already invested in the with-profits fund and that no investments are made in that fund, other than the investment of stakeholder scheme assets.
  • At least once a year, the insurance company who are providing the with-profits fund must provide the trustees or manager of the stakeholder scheme with a certificate from their auditor or appointed actuary. The certificate should state that the insurance company has the appropriate systems and controls in place to ensure that the regulations are complied with and that no expenditure is charged to the with-profits fund, in addition to the permitted annual charge.

Regulation 16 - Providing other services

  • Stakeholder schemes can make separate charges, in respect of services other than the management of the scheme and its funds.
  • Unless the charges for additional services fall within the permitted maximum, they will only be allowed where there is a written contract, separate from the membership contract, which sets out the amount of any charge and the terms on which it is to be paid; for example, it would be possible for stakeholder schemes to have a separate arrangement in place to charge for providing detailed individual financial advice to members.
  • Stakeholder schemes cannot require, as a condition of membership, that the member enters into any other contract; for example, they could not require that members of a stakeholder scheme are required to take out a life assurance policy with the stakeholder scheme provider, where such a policy would be subject to an additional charge, resulting in the overall permitted charge to be exceeded.

Regulation 17 - Restrictions on contributions

  • Members of stakeholder schemes will be able to make contributions to the scheme as they wish, subject to the restrictions set out below.
  • Trustees or managers of stakeholder schemes may refuse to accept a contribution if it is less than £20. However, any payments of £20 or more must be accepted, whether this is a one-off or regular payment.
  • The £20 minimum contribution does not apply in respect of amounts of tax relief or in respect of "minimum contributions", which are the rebates received by those members who contract-out of the State Earnings Related Pension Scheme (SERPS), or any successive state arrangement.
  • Stakeholder schemes are allowed to refuse contributions, where accepting them would prejudice their tax-approved or tax-exempt status; for example, if the contributions would exceed the permitted maximum amount.

Regulation 18 - Disclosure of information to members

  • Each member of a stakeholder scheme will receive a statement from the trustees or manager of that scheme of the value of their rights under the scheme at least once a year; that is, an "annual benefit statement", which should show changes in the value of each member's fund during the "statement year" in question.
  • In this context, "members" would also include retired members, who are no longer accruing pension rights, but who have opted to take advantage of "income drawdown" facilities.
  • The annual benefit statement must contain information as set out in this regulation, including;
  • a) The total value of the member's rights under the scheme, both at the start and at the end of the statement year in question, including the value of any protected rights, (accrued through being contracted-out of SERPS);
  • b) The effects of any investment growth, during the statement year, on the value of the member's fund under the stakeholder scheme, net of any payments made;
  • c) The payments made to the stakeholder scheme by or on behalf of each member and the date on which each payment was received. The statement should set out the different elements of payments separately;
  • d) Any amounts transferred in from a previous pension arrangement, including the date it was received and the name of the scheme from which the transfer was made;
  • e) Where there has been a pension sharing order or agreement made, any amount credited to or deducted from a member's account in respect of such an order or agreement;
  • f) Any other deduction(s) made;
  • g) The amount deducted from payments to the scheme and from any investment growth, in respect of the scheme charge in force; and
  • h) Where the member's rights are invested in a with-profits fund, the annual benefit statement should include details on how the member's rights within that fund are determined, together with "plain English" information about the operation of the with-profits fund.
  • Each member of the scheme should be informed about any change to the scheme charge within one month of the change.
  • The scheme providers can comply with the provisions of this regulation by sending the statement to the member's last-known address. However, the scheme will not be prevented from issuing the statement by some other means; for example, via the internet.

Regulation 19 - Trustees of trust based schemes

  • For stakeholder schemes established under a trust, the trustees of that scheme should comply with sections 35 and 36 of the Pensions Act 1995, which sets out the functions of trustees in relation to selecting investments and maintaining a Statement of Investment Principles

Part III - Registration of Stakeholder Pension Schemes

This Part describes the registration of stakeholder schemes and the publication of the register.

Regulation 20 - Registration of non-trust based schemes

  • Trustees or "Prescribed persons" must apply to the Occupational Pensions Regulatory Authority (OPRA) for registration of a stakeholder scheme ("Prescribed persons" are managers of a stakeholder scheme, which is not set up under a trust).
  • Prescribed persons will be subject to the same civil penalties that apply to trustees of trust based schemes under the Pensions Act 1995 if they fail to comply with the regulations.

Regulation 21 - Access to the register of stakeholder schemes

  • A register of stakeholder schemes will be established by OPRA and will be available to anyone who wishes to see it. OPRA may publish the register in any way they choose; for example, they may decide to make it available via the internet.

Part IV - Employer Requirements

    The overriding requirement on employers is that where they are not exempt, as set out in the regulations below, they must designate a stakeholder scheme for use by their employees, provide information about and access to the designated stakeholder scheme to those employees and, on request, facilitate the payment of employee contributions to the designated stakeholder scheme via their payroll systems.

Regulation 22 - Exemptions for employer access and consultation requirements

  • This regulation covers exemptions to the general requirement on employers to provide their employees with access to a stakeholder scheme.
  • An employer does not have a duty to facilitate access to a stakeholder scheme if he has fewer than five employees.
  • An employer need not offer access to a stakeholder scheme if he offers all "relevant employees" (see regulation 23), except those aged under 18 years, the opportunity to join a Personal Pension Plan (including a Group Personal Pension Plan), subject to particular conditions as outlined below.
  • It should be a term of the contract of employment that the employer will make contributions to a Personal Pension Plan , on behalf of any employees who join. The employer should also make payroll deductions of the employees' contributions, (if and where appropriate) and pass them on to the Personal Pension Plan provider, where the employee asks the employer to do so.
  • The employer must ensure that the chosen Personal Pension Plan does not impose explicit charges or penalties, if a member decides to leave that scheme or to stop paying contributions to it (however, see the next bullet point).
  • Although Personal Pension Plans already in force cannot apply new exit charges on members who subsequently transfer to another arrangement or stop contributions to the Personal Pension Plan, charges that would have applied when leaving the existing Plan, such as administration, commission or dealing costs can still be applied.
  • "Market value adjustments" applied in relation to with-profit funds will not qualify as charges or penalties for the purpose of transferring funds or stopping contributions to a stakeholder scheme.
  • Each employer contribution must be at least 3 per cent of the employee's "pay" for the period in question and those contributions must be paid to the Personal Pension Plan at the same frequency as any employee is paid unless the employer and employee agree otherwise.
  • Within this regulation, "pay" is defined as basic pay; that is, not including any bonuses, commission, overtime or other such payments.
  • An employer can make their contribution to the Personal Pension Plan conditional on the employee matching that contribution at the same intervals. For Personal Pension Plans established prior to 8 October 2001, no maximum employee percentage contribution is imposed by this regulation, (other than the overriding Inland Revenue maximum contribution percentages to Personal Pension Plans); however, for arrangements established on or after 8 October 2001, an employer cannot require an employee to contribute more than 3 per cent of their "pay" each year.
  • An employer will not have to comply with the employer access requirement if they can provide written evidence to show that contributions are being made and have been made before 8 October 2001, to a Personal Pension Plan, as if employees had a provision within their contract of employment that would satisfy this regulation.

There are other circumstances in which an employer will not have to comply with the employer access requirements;

  • a) Where any employer first comes under the terms of the requirements, (for example, when they employ a fifth employee), they then have three months from that date in which to comply;
  • b) If an employer has once had to comply with the requirement, but has subsequently ceased to have to do so and they once again become liable to do so, they have three months in which to comply; and
  • c) If an employer withdraws their designation of a stakeholder scheme, they then have four months in which to designate a new stakeholder scheme.

Regulation 23 - Definition of relevant employees

  • Employers are required to provide access to a stakeholder scheme in respect of any "relevant employees". The definition of relevant employees excludes those employees:
  • a) who can join an occupational pension scheme within 12 months of starting work for that employer;
  • b) who cannot join an occupational pension scheme, because they are either under the age of 18 or within 5 years of normal pension age for the scheme in question;
  • c) who at some time in the past, were eligible to join an occupational pension scheme, but are now excluded from membership of that scheme, because they did not join the scheme when first eligible to do so;
  • d) who have worked for them for less than three continuous months;
  • e) whose earnings have not equalled or exceeded the National Insurance "Lower Earnings Limit" for one or more weeks in the last three months
  • f) who cannot make contributions to a stakeholder scheme, because they are prevented from doing so by Inland Revenue restrictions.

Regulation 24 - Payroll deduction of contributions

  • This regulation restricts the frequency with which an employee can amend the rate at which deductions are made through the employer's payroll.
  • Generally speaking, where an employee requests an employer to make deductions of contributions or vary contributions to a stakeholder scheme from his remuneration, the employer must comply with this request as soon as possible but no later than the end of the pay period subsequent to the pay period in which the request is made.
  • The employer need not comply with any requests for changes or variations to the payment of deductions out of the employee's remuneration within 6 months of the previous variation. The employee must be notified if the request is not to be actioned.
  • Deductions however, from an employee's remuneration can be cancelled at any time.
  • If an employee cancels payroll deductions, then the employer is not required to reinstate them for a further six months. The employee must be notified if this is the case.
  • For the purposes of payroll deduction, a "qualifying scheme" will include not only the scheme currently designated by an employer, but also any scheme which was previously designated.
  • Where an employer is notified that a designated stakeholder scheme has commenced winding up, the employer must immediately cease making deductions from the employees' remuneration in respect of contributions to that scheme and notify the employees in writing, as soon as possible, that those deductions have ceased.

Regulation 25 - Disclosure of information to relevant employees

  • Where an employee asks an employer for the first time to make or vary deductions of contributions to a qualifying stakeholder scheme from their pay, the employer must, within two weeks of receiving that request, give notice in writing to the employee, containing the following information;
  • a) The ways in which the employer will accept requests to make, vary or cease deductions;
  • b) Advice that the employer does not have to comply with any further request made within six months (or where applicable, a lesser period) of the date of any previous request to make, vary or cease such deductions;
  • c) Advice that the employee can, at any time, ask the employer to cease such deductions immediately; and
  • d) Advice that the initial request to make deductions will be complied with as soon as possible, but no later than the end of the pay period following that in which the request is made.

Part V - Amendment of Regulations under the Pension Schemes Act 1993 and the Pensions Act 1995

Regulations 26 to 32 respectively, make textual amendments to regulations made under the Pension Schemes Act 1993 and the Pensions Act 1995, in consequence of the introduction of stakeholder schemes. The amendments apply regulations, which previously applied only to occupational schemes, to other schemes.