Business has had to cope with a flood of legislation and regulation since the Labour government came to power in 1997. The Confederation of British Industry estimates the added cost per year of complying with new measures is £12.3bn.
Some laws, such as the Working Time Regulations introduced in 1998, have contained ready-made ways to avoid the more stringent measures. The WTR, for instance, allows employers to secure ‘flexibles’ and ‘opt-outs’ to minimise the impact on their business – so long as it is agreed by the workforce.
The Welfare Reform & Pensions Act 1999 is different. Stakeholder pensions were a major feature of the government’s election manifesto and they have left little room to manoeuvre.
These low-cost savings plans went on sale on April 6 and within six months almost all companies with more than five employees will have to offer them one of the schemes.
There are minor exceptions, but a fine of up to £50,000 can be imposed if an employer fails to meet the October 8 deadline. There is a crumb of comfort: the government stopped short of compelling employers to make contributions – for the moment. Many people in financial services are sure this will change after the election.
Stakeholder pensions are targeted at people earning £10,000-20,000 a year, but they will be available to almost everybody.
Unlike Personal Pension Plans, this includes people who are not actually working, as well as fixed contract workers, the self-employed and PAYE employees.
The minimum monthly contribution to a stakeholder pension is £20 a month. Everyone is allowed to invest up to £3,600 a year, regardless of earnings. Outside of that, the long-standing Inland Revenue restrictions apply of 17.5% of annual earnings for anyone aged 35 or less, on a sliding scale up to 40% for anyone older than 61.
For employers, the stakeholder pension rules mean they must provide a scheme for their employees. The exceptions are if they have fewer than five workers, they already have an approved occupational pension scheme or they contribute at least 3% of their employee’s pay into a personal pension on their behalf.
Exclusion zones
Certain workers are excluded under pay and service provisions – employees who have been employed continuously for under three months or have not earned more than the National Insurance lower earnings limit within that time (about £67 per week).
An existing occupational scheme throws up more exclusions – those who cannot join their employer’s occupational pension scheme because they are under the age of 18 or who are within five years of the scheme’s retirement age or who can join the occupational scheme within a year of starting work.
Once these points have been clarified, a company that falls within the legislation has to designate a Stakeholder Pension Scheme in consultation with its staff.
However, the regulations do not give any indication of how this should be done and, to muddy the waters further, employers should take care not to advise employees as providing financial advice is restricted to people regulated by the Financial Services Act.
A register of schemes that meet the government’s criteria was opened on April 6 by the Occupational Pensions Regulatory Authority (OPRA). This is the body set up by the government to police the legislation. Details of approved schemes can be found on OPRA’s website at www.opra.gov.uk.
The foundation of qualifying as a stakeholder provider, excluding small-print regulatory details, is that the scheme must be cheap and the charges transparent. The main plank is that the scheme cannot levy any more than a 1% annual management fee and effectively must offer a choice of funds in which the money is invested.
Most schemes declared so far offer half a dozen funds, but these include cash funds and fixed interest such as gilts. These are used by most pension plans to protect the money of members nearing retirement age from the risks of a volatile stock market. The remaining most popular funds are based on the FTSE All Share. However, one provider offers as many as 30 actively-managed funds with exposure to geographic and business sectors.
About 30 groups from banks, building societies, insurance companies and the financial services operations of companies like Marks & Spencer are competing for business.
Few have revealed the full extent of their plans, but there is strong competition to come in below the 1% charge with levels of 0.75%. However, this can be deceptive.
When the annual management charge is calculated on a daily basis, in the same way as a mortgage, the effect of 1% is far greater than an investor would expect from the headline rate.
For instance, a lump sum of £25,000 invested for 20 years, assuming the fund grew at 7% per year, would provide a pot of £96,750.
One provider, which rolls up the 1% in the daily calculation – as most do – said its Stakeholder Pension Plan would produce a pot just shy of £78,000. The provider over that time would have helped themselves to £17,000.
If the fund is actively managed and there are buying to selling unit prices charged (in the same way that banks buy back your foreign currency at less than they sold it to you), the effect is far greater.
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“About 30 groups from banks, building societies, insurance companies and the financial services operations of companies like Marks & Spencer are competing for business” |
At retirement age, the member of a stakeholder scheme faces the same decision as a member of any other pension plan. They can take up to 25% of their pot as a tax-free lump sum and use the remaining 75% to buy an annuity. Or spend it all on an annuity.
At current rates £10,000 buys a retirement income for life of about £900 a year, excluding the complications of guaranteed minimum or index-linked contracts.
The Financial Services Authority (FSA) will regulate the marketing and promotion of schemes, including any occupational pension schemes that are set up as stakeholder pension schemes.
Charges for advice
Any extra charges by independent financial advisers for advice on stakeholder pensions must be optional. Any charge levied for advice above the 1% limit cannot be deducted from the pension contributions and has to be made separately from the scheme charges.
OPRA and the FSA say they will work together to ensure that stakeholder schemes are run according to the rules.
An employer does have duties under the regulations and one is to check regularly that the scheme is still registered with OPRA. If the chosen scheme has its registration withdrawn, then the employer has four months to designate a new one.
Once the scheme has been chosen, employees must be provided with full details, an address and telephone number. The scheme providers will usually supply literature for employees and a representative may visit the workplace.
However, employers should keep records detailing the consultation process and the distribution of literature, and formally record the decision to designate a scheme.
Other duties include offering to deduct scheme contributions from employees’ pay and to maintain and keep records of deductions from pay and payments to the scheme.
Employees can make payments themselves. Their contributions are voluntary and each employee can choose the amount and frequency of their contributions, including one-off payments.
Contribution amounts
They are also allowed to change the amount they contribute, although no more than once in any six-month period, unless agreed with the employer and scheme provider.
If the employer makes the deduction, the money must be paid to the scheme provider within 19 days of the end of the month in which the deduction was made.
Despite all this, however, employers do not have to manage the scheme themselves. This can be handled by a stakeholder manager. The stakeholder manager could be an insurance company, bank, building society or independent financial adviser, but must be authorised by the FSA to carry out stakeholder business.
One insurance company is offering a complete management service online. Provided the employer furnishes the appropriate pay and deductions information, the scheme is fully managed and can be followed on a website.
Trust-based schemes are allowed to restrict eligibility, such as keeping it open only to members of a union, profession or professional body. Schemes set up by a stakeholder manager are not allowed to restrict their membership in this way.
Payments can be made to the stakeholder scheme provider by cheque, direct debit or credit, but providers can refuse to accept payments in cash or by credit card.
Keeping accurate and up to date records is essential. Employers will need to be able to show all contributions, the amounts and dates, and copies must be sent to the scheme provider so that they can monitor the arrangements.
The employer must notify the provider of any changes to contributions and comings and goings of employees by the first due date for contributions following any change.
And to make sure employers do all this, OPRA has the power to fine employers found to be in breach of the regulations and can instigate criminal proceedings for more wilful behaviour.
