Although 2006 figures for stakeholder use are encouraging, planned national savings accounts could have repercussions, says Ceri Jones
Stakeholder pensions have attracted their share of criticism since they were introduced in 2001. According to a scathing analysis by the Treasury Select Committee (TSC), the failure of stakeholder plans to attract critical mass has led to the decline of non-state provision among middle earners. Its report, Restoring confidence in long-term savings, which was published in July 2004, stated that a combination of sales approaches, commission incentives and regulatory requirements have "created a position in which stakeholder pensions are seen as uneconomic to both providers and potential customers among the original target market of middle-income earners".
According to the Association of British Insurers (ABI), just over 2.7m stakeholder pensions have been sold since they were introduced on 6 April 2001, with £2.4bn of contributions made by employers and employees in 2004/05. This is not significantly more than total gross sales for Individual Savings Accounts (ISA) which were introduced in 1999 as a way for individuals to save. According to the Investment Management Association, ISA savings for the tax year 2005/06 totalled £1.8bn.
The new national pensions savings accounts, outlined in the White Paper Personal accounts: a new way to save published in December 2006, are due to be launched in 2012 and could have repercussions for the stakeholder market. Once introduced, employers will have to make compulsory contributions of 3% of an employee’s salary. A further 4% will be contributed by the employee and another 1% from the government.
In the near-term there will be little impact on stakeholder pensions. However, for life offices, the advent of pensions savings accounts is likely to take the incentive out of selling stakeholder plans because the amounts saved are often small and the charges they are allowed to make are capped at 1.5% of the fund per year. As a result, providers do not breakeven until somewhere between year 12 and year 15 of providing a scheme. Robert Wyllie, marketing director at provider firm Scottish Widows, says: "[The new savings account] will have an impact on the market. Business written today will typically only be halfway to breakeven by the time the new [national pensions savings] plans come in."
The raising of the allowable charges in April 2005 to a maximum of 1.5% of the stakeholder fund per year, from the previous cap of 1%, has helped to boost the incentive for independent advisers to sell stakeholder plans. After the first ten years, however, charges revert to 1% a year. Charges for members of plans set up before April 2005 remain at a maximum allowable of 1%.
The effect of the new charges is reflected in much healthier stakeholder sales figures from the ABI showing that employer-sponsored stakeholder premiums were £371.4m in 2005, compared with £459m in the first nine months of 2006. Since both providers and financial advisers often need a critical mass to make stakeholder business worthwhile, many prefer to sell other group personal pensions where a wider range of funds are available with commensurate higher charging structures. Their theory is that a wider range of high-quality stock-picking funds will make much more difference to the final pension than trying to skimp on the charges and making do with poorly performing investments. However, a high charge is no guarantee of a good or even above-average performing fund.
Another issue to emerge is that the new and more generous pension contribution limits brought in as a result of pensions simplification in 2006 ironically reduce the incentive for employees to start a pension as soon as possible. This is because it can now be more advantageous for people to wait until they are in a better position to make large, single pension contributions as a higher-rate taxpayer, where they get greater tax relief. The amount they could contribute before in any single year was much more limited.
For employers, there is little to choose between one stakeholder plan or another, which is a direct reflection of the product’s origins as a simple no-frills concept that is easy to understand. There are currently 45 stakeholder providers, of which 14 place no restriction on employers other than those embodied in the stakeholder regulations.
Several providers, such as Abbey, insist that employers using their schemes administer them over the internet. Others stipulate that the scheme must have a certain number of members, such as 100-plus members at Fidelity and a more modest 25 at the Halifax. Others, such as Prudential, will only take business from an intermediary on their approved panel, while the Nationwide Building Society only accepts members on an individual basis.
Most stakeholder providers that are successful in attracting business, such as Axa, Clerical Medical, Friends Provident, Legal & General (L&G), Scottish Equitable and Scottish Widows, offer a wide range of funds. L&G offers a choice of 40 funds, 17 of which are run by external managers. It also offers a range of tracker funds, including ones following the markets in Britain, Europe, the US, Japan, a global index and gilts.
Scottish Widows offers a choice of 23 funds, but members can only invest up to 30% in its external funds run by Merrill Lynch, Newton and Schroder. Friends Provident, meanwhile, offers a choice of 23 funds, including a UK and a global tracker. Its actively-managed funds are run by its subsidiary, F&C Asset Management.
L&G offers charges on a sliding scale so that the plan holder pays less if they have more in their pension account, while Scottish Widows has maintained the pre-April 2005 1% charge for all amounts. Since April 2005, schemes must also offer a so-called lifestyle fund that switches progressively from equities, which can be volatile, into bonds and cash, which are more stable as a member approaches retirement. Following their mandatory introduction, schemes must notify all existing members that this option is available by April 2007.
Perhaps the most important issue in selection will be choosing a provider that will stay the distance. Think back to Equitable Life, which closed its doors to new business in 2000, but was once a provider of the highest repute. Pensions, after all, are long-term plans, which might not be commuted into an annuity until 50-plus years in the future.
What are stakeholder pensions?
Stakeholder pensions are cheap, simple money purchase pension schemes with a cap on charges that providers can levy. Minimum contributions of as little as £20 at any time must be accepted by the stakeholder plans. Employees must be allowed to vary their contributions up or down without penalty, although employers can state that changes can only be made once every six months.
What are the origins of the product?
Stakeholder pensions were introduced in April 2001 as a cheap, flexible pension product for those on low incomes. They will probably be superseded in 2012 by the new national pensions savings accounts announced in the December 2006 White Paper on pensions.
Where can employers get more information and advice?
The Pensions Advisory Service runs a stakeholder telephone helpline on 0845 6012 923. The Pension Service (www.thepensionservice.gov.uk), which is contactable on 0845 6060 265, publishes a leaflet called Stakeholder pensions – a guide for employers. The Pensions Regulator (www.thepensionsregulator.gov.uk) is also contactable on 0870 606 3636.
What are the costs involved?
The maximum permitted charge for stakeholder pensions is now 1.5% of the fund for the first 10 years of a new contract. After the first 10 years, the charge reverts to a maximum of 1% per year. The charge remains at a maximum of 1% for plans set up before April 2005. Independent financial advisers will also charge for any work they do setting up a plan. This may be a fee or taken as commission through the provider.
What are the legal implications?
Employers must offer a stakeholder plan if they employ five or more staff but are not required to contribute. Exemptions apply for employers offering occupational pension schemes or contributions of 3% or more into personal pensions for all staff aged 18 or over. Employers need not pay for the provision of any advice, but they must provide employees and organisations representing them with basic information about the scheme.
What are the tax issues?
Employer and employee contributions qualify for tax relief. Since April 2006, contributions are no longer restricted. Members are eligible for tax relief on contributions of up to 100% of their earnings providing this does not exceed the annual allowance (£215,000 for the tax year 2006/07).
What is the annual spend on the product?
Data from the Association of British Insurers reveals that contributions into stakeholder plans from employers were £467m in 2002, £377.8m in 2003, £420m in 2004, £371.4m in 2005 and £459m in the first nine months of 2006. This may be because life companies are promoting and selling more schemes since the annual fee they can change increased from 1% to 1.5% of each fund in April 2005. The figures for stakeholder premiums are not terribly accurate, however, as money can be transferred from other pension schemes.
Which providers have the biggest market share?
There are 45 pension providers offering stakeholder products, of which 21 accept only corporate business. Those with the greatest market share are believed to include Winterthur Life, Friends Provident, Legal & General, Prudential, Scottish Widows and Standard Life, but industry figures are not available.
Which providers have increased their market share in the last year?
Industry figures are not available.