New Labour, New Pensions
NatWest Life Assurance
(From Issue 6,January 1999)
The long – awaited Government plans for pensions reform, including the introduction of Stakeholder Pensions, were published at the end of 1998. What are the key features of the proposals?
Politicians from all sides have long recognised the need to reform the UK’s pension system. As the population ages, the state’s pension bill rises. In order to keep taxes down, the value of state pensions has been allowed to dwindle in relation to earnings. Private pensions are widespread, but there are still large numbers of people with inadequate provision. The current edition of the NatWest Pensions Index (September 1998) shows that only one in five people are on track to receive £192 a week. That is the minimum amount which people who are retired today say is necessary for a comfortable retirement.
To address this the government is proposing reforms to the state pension system and a new private pension option: ‘Stakeholder Pensions’. These are intended to be simple, secure and flexible products which offer value for money even when very low or intermittent contributions are paid. It is hoped that private pension coverage and adequacy can be significantly increased while retaining a state safety net.
The Department of Social Security has responsibility for developing the pension reform proposals. It launched a review process in July 1997 including consultation with the pensions industry and other interested organisations. The process was delayed when Minister for Welfare Reform, Frank Field, resigned last Summer and Secretary of State for Social Security, Harriet Harman, was reshuffled out. Her replacement, Alistair Darling, and then Pensions Minister John Denham have now re-examined the options and published the Pensions Green Paper on 15 December 1998.
The proposals for state pension reform are:
- The Basic State Pension will continue unchanged and its value will therefore continue to reduce in relation to earnings.
- A minimum income guarantee will provide Income Support top ups for any pensioner with an income of less than £75 a week.
- The State Earnings Related Pension Scheme (SERPS) will be replaced by a new State Second Pension (SSP) starting in April 2002.
- The new SSP should give higher pensions to lower earners and some non-earners will also be given credits in the scheme.
- As happens now with SERPS, employees will be able to opt out of SSP and have a National Insurance rebate paid into a private pension.
Turning to Stakeholder Pensions, the proposals are:
- Minimum ‘CAT’ standards will be specified for Charges, Access and Terms.
- Contributions of up to £3,600 a year will be allowed and contributions can continue to be paid for up to 5 years during a career break.
- Employers must provide access to a Stakeholder pension if they do not offer an occupational scheme or for any employees not eligible for the company’s occupational scheme and must act as a collection agent to deduct contributions from wages and pass them on to the pension provider.
- Stakeholder pensions will have the same beneficial tax treatment as other pension arrangements.
- Better quality information for members and potential members is intended to reduce the need for individuals to seek advice.
- The new schemes will be group arrangements, run under trust law and provided by employers, financial services companies and ‘affinity groups’.
Currently, employers are the only people likely to set up group pension schemes (although some industry – wide arrangements exist and there have been recent moves in this direction). Stakeholder pensions could encourage a whole range of ‘affinity groups’ to set up schemes for their members and this seems to be the government’s intention. Affinity groups might take many forms and represent any common bond or affinity between members. Members of a Chamber of Commerce, trades union or professional association, for example, supporters of a particular charity or geographic groupings such as councils. Ideal affinity groups would already have a financial relationship with their members.
The idea is that the employer, affinity group or other Stakeholder provider will set up a board of trustees, including member representatives, to take responsibility for the scheme. This board might not have exactly the same constitution as current occupational scheme trusts and the government is also happy to consider alternative governance structures. The theory is that the trust board will be able to negotiate with pension providers to secure a better deal for its members. It might arrange a packaged scheme with one provider or buy in services such as fund management or administration from more than one source. Once a scheme is established, the affinity group might collect and pass on the contributions and the trustees could watch over the scheme’s operation.
Obviously, to be worthwhile, the trustee board must add value to the process and it should therefore be run on a professional basis. The reductions in costs it is able to secure for its members must outweigh the costs of recruiting, training and operating the board. Alternatively, the board will have to prove its value by demonstrating that it can provide the scheme members with a level of supervision and security beyond that which they would otherwise have. Opportunities will exist for trustee boards which can meet these criteria.
Although Stakeholder is intended to add to, rather than replace, existing pension arrangements, it is also bound to have an effect on current schemes- For example, the government is hoping that other providers will compare their products against Stakeholder CAT mark criteria. More detail is also expected shortly about a ‘Quality in Pensions’ accreditation for which occupational pension schemes will be able to apply.
The introduction of Stakeholder Pensions will present an additional option and businesses with a company pension scheme may have to consider integrating it with the new Stakeholder regime. In many cases, sponsoring employers may have been considering a scheme wind up or replacement. Stakeholder pensions could be the catalyst for such a change. Personal customers will also be faced with a new choice and many are likely to find Stakeholder Pensions attractive.
© Joanne Hindle
NatWest Life Assurance 1999