The next few years could be a lean time for stakeholder pensions as employers wait to see what the planned system of personal accounts will bring when it comes into effect in 2012. Steve Meredith, pensions technical director at Clerical Medical, says: “With personal accounts coming along, a planning blight is likely for a few years until the detail is clarified. Employers are naturally reluctant to set up a new arrangement when so much about the new system is still up in the air.”
Much will depend on how much personal accounts undercut stakeholder schemes on charges. It has been suggested these could stand at about 0.5percent at the outset, subsequently falling to 0.3percent, but the industry has lobbied the government to make it clear that this will be insufficient despite the economies of scale involved. “It will depend on the paperwork involved, the scheme’s complexity and the legislation,” adds Meredith.
In the meantime, there is little to differentiate the 45 stakeholder plans available from providers such as Axa, Friends Provident, Legal & General, Scottish Life, Scottish Widows and Standard Life. The three most important factors for employers to consider are fund range, charges and administrative excellence, but there is not much to choose between providers.
Legal & General offers one of the widest stakeholder fund ranges, which links to 40 funds, including 17 run by external managers, and an extensive range of indexed funds. Friends Provident and Scottish Widows are fairly typical in offering 23 funds, but the latter allows only 30percent in external funds.
Charges make a surprising difference over the life of a plan. An annual charge of 1percent, small as it may appear, on a £200-a-month contribution over 25 years could eventually consume £23,000. When stakeholder plans were first introduced, charges were capped at 1percent and subsequently raised to 1.5percent for the first 10 years, but most providers charge less for large funds. Friends Provident, for example, drops its annual management charge to 0.9percent once funds exceed £20,000, to 0.8 percent for £50,000-£100,000 and to 0.75percent for funds over £100,000. Legal & General charges 1percent up to £25,000, 0.9percent for £25,000-£50,000 and 0.8percent for £50,000 plus. Unusually, Scottish Widows drops its charge to 0.8percent for online applications.
Another consideration is that although 1percent or even 0.8percent is relatively cheap for an active fund, it is more than an indexed fund under a different wrapper may cost. For instance, it might cost just 0.25-0.3percent to invest in a UK tracker fund through a self-invested personal pension (Sipp).
The stakeholder concept has been so successful in driving down charges that, ironically, they are sometimes more expensive than many alternatives. A basic Sipp without advice, for example, can cost 0.8percent, dropping to 0.3percent for pots over £25,000. But in practice, many providers no longer make a clear distinction between different types of plan. John Gleadall, senior manager wealth policy at Legal & General, says: “How these products are packaged is becoming a slight irrelevance. An employer will decide it wants to put a pension in place, but may not decide the actual type of scheme until the last moment.”
Jeremy Ward, head of pensions marketing at Friends Provident, adds: “We don’t make much distinction between a GPP and a stakeholder. With a stakeholder, you have to have funds that fit the charging structure, but, in reality, there is a separate choice to be made between the administration platform provider and the investment provider because almost the entire universe of funds is available to all the funds platforms.”
In 2012, employers will have to auto-enrol staff in either a personal account or an exempt pension scheme. When the new system of accounts goes live, a basic-rate taxpayer currently receiving no contribution from their employer in a stakeholder plan will, if well advised, abandon it and start a personal account.
But not everyone agrees that stakeholder plans will be phased out altogether. Scott Mowbray, a spokesman for Virgin Money, says: “Stakeholders will co-exist with personal accounts post-2012. Stakeholders are portable, flexible and have brought charges down and set the terms of the debate. Importantly, 2012 is four pension saving years away and everyone should be saving until then and not delay on making provision for a comfortable retirement.” ebIf you read nothing else, read this…
n The existing stakeholder pensions market is increasingly homogenous, with similar fund choices and tiered charging structures, but as open platforms develop, distinctions between traditional types of pension are becoming blurred.
n Something of a pension planning blight is expected until the final details of personal accounts are ironed out, particularly around its charging structure.
n The publicity behind personal accounts is likely to highlight the general inadequacy of current contribution levels into money purchase plans and some employers are already improving stakeholder plans to differentiate their organisations.