Stakeholder on menu
The introduction of stakeholder pension schemes in the UK form the basis of a major overhaul of the UK’s pension fund industry, Dick Stratton of William Mercer told the National Association of Pension Funds (NAPF) annual conference in Birmingham. “Stakeholder pensions signal a major change to the pensions landscape,” he commented, pointing out that the basic principal was to provide pension plans more cheaply and easily than in the past in order to stimulate growth in the number of people on lower incomes who save for their retirement. “Apart from passing basic healthchecks, people won’t really have to do anything, since the onus falls firmly on the employer to provide the new schemes.” Although employers don’t need to contribute at the moment, he envisages a situation where within five years the government will make employee contributions nonetheless compulsory.
Stratton believes that the concept of stakeholder pensions has already moved on to include medium and high income earners and not just the lowpaid and points out how the reforms broaden the pensions marketplace. “We can take out stakeholder pensions for partners, children, grandchildren, even the unemployed and those that have already retired can participate for up to five years.” What used to be “nice and simple” was now changing, he says. “We see a different scenario creeping up on us and the new opportunities mean that we will need to think in a new mind set.” Another important feature is that people working overseas can take part, even if their earnings are not UK based.
Joanne Segars, who is senior pensions officer for the Trades Union Congress (TUC), told the conference that the stakeholder pensions will give half a million people the opportunity to participate in a pensions plan and that this is why the TUC was setting up its own scheme. “Although 85% of union members are in occupational pension schemes, about half a million or so members who work part-time and who are on temporary or fixed contracts are not. The new scheme opens a window of opportunity for them.” In addition, as many as 5.5m workers could do with a “top up”.
The TUC schemes give small affiliates the power to get good deals from insurance companies and allow unions to work closely with employers, especially small companies, who may need advice and help in setting the new schemes up.
The TUC could also help educate people to overcome their mistrust of occupational pension schemes and insurance companies as well as act as an overseer of the new schemes.
Segars agrees that employers should contribute, particularly large companies who can afford to. “Small companies could be exempted from compulsory contributions, since it may affect their growth and competitiveness.”
Steve Bee, head of pensions at Scottish Life, said that stakeholder pensions heralded the death knell for individual pension plans. “Individual personal pensions have had their day,” he says, adding that of a workforce of 27m, about half were in occupational schemes, and it is working out who is “relevant” out of the other half where the fun begins.
Elsewhere, Will Hutton, speaking as chief executive of the Industrial Society, told the conference that the Equitable Life fiasco had highlighted the scale of risks that individuals take at a time when capital markets were volatile, something he believes they are ill-equipped to protect themselves against without proper advice and education. “I am led to challenge the moral and ethical underpinning of the philosophy that retirement incomes should be so closely linked to individuals’ capacity to save along with the performance of the capital markets.”
He believes that individuals should be able to adopt a portfolio type approach to retirement savings to help spread the risk, and that an unfunded universal state pension should be present in every pension portfolio. “The risk does not go away because government and employers are unable to accept it.”
He suggests that the pensions community needs to accept more market risk than at present and that there should be a redistribution of income to support a universal state pension. “We can and should live with some part of our retirement incomes being unfunded. Funded pensions are a national success story but there is a limit to how far the principle can be extended, especially in a period of stagnating equity markets and low annuity rates.”