Minimum Standards for Stakeholder Pensions
ACCA’s response to the Consultation Brief 1: Minimum Standards for Stakeholder Pensions issued by the Department of Social Security is set out below.
Investment
In paragraph 53, the brief suggests that stakeholder schemes should be allowed to offer potential members an element of choice as regards the investment of fund assets.
It should be borne in mind that, if there were to be any provision for investments to be switched subsequently at the request of the member, then this would inevitably have material cost implications, which will have to be charged to the member. The Department may therefore need to make clear that choice is exercisable only at the outset.
Charges
The paper stresses the need to keep the basis of charges simple to understand. While this is commendable, and while we agree that charges should be kept low as an incentive to join stakeholder schemes, the need for simplicity should not interfere with the setting of a fair pricing mechanism.
We would argue that, while the most expensive products are rarely the best choice, the cheapest are even more rarely so. The overall objective of the stakeholder project is, as we understand it, to increase the general level of pension provision, particularly among middle earners. It is a fact that individuals within this group rarely make sufficient provision for their retirement, and one of the major causes of this is the widespread lack of understanding of pensions. Driving down costs to a minimal level will reduce the scope for the provision of advice, which will in turn serve to maintain and enhance the current state of relative ignorance. It would be a false economy if, in the interests of keeping charges low, individuals were to subscribe to arrangements that were unsuitable to their circumstances or did not offer the prospect of a satisfactory retirement income.
We would also be concerned if the charge cap were set at a level that had the effect of discouraging potential providers from entering the stakeholder pension market. If the charge cap is to be set at 1% of fund value, then it may be necessary to think in terms of limiting the number of transactions that schemes carry out.
There may be some merit in dividing the charge between a percentage of the contributions and a percentage of the fund value. This would allow members who find it necessary to suspend their contributions to feel that the costs to them will reduce. It is likely that, in many cases, suspension of contributions will result from unemployment, which will cause disruption of income on the part of the member.
Advice
We agree that prospective members of a stakeholder scheme should always be exposed to advice before joining. We consider that, wherever possible, the charge for advice should be included in the set scheme fees. This would, however, be dependent on defining clearly what is included and excluded. Members are likely to be deterred from seeking advice if it were always an additional charge and the inclusive items should cover the basic elements of advice.
Minimum contribution levels
It needs to be borne in mind that the handling of a large number of small value transactions will be expensive for a stakeholder scheme to administer: this has clear implications for charge levels. The proposed minimum contribution level of £10 appears to us to be quite low. While it may be feasible for members to make regular, payroll-deducted contributions at this level, the minimum level for one-off contributions may need to be set higher.
Administrative burdens
While the various responsibilities of employers as regards the stakeholder pension will no doubt be covered in later consultation briefs, it appears to us already that the requirements for employers to nominate stakeholder schemes and, in particular, to be responsible for collecting and passing on contributions are likely to prove a significant administrative burden on small firms. Even if a clearing house system is introduced, it will still be incumbent on each employer to ensure that specific contributions are paid in on behalf of particular employees. Given the Government's current concern to minimise regulatory burdens generally, the Department will doubtless wish to ensure that the stakeholder compliance rules that are imposed on small firms are kept as administratively simple as is practically possible.