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off... Back when stakeholder was just a twinkle in the eye of successive pensions ministers, the intention was to cap contributions at £3,600 per year. This placed its target market firmly in the “moderate earners” category, and it was envisaged as a no-frills pension that could be delivered with a minimal level of guidance. The only question that needed to be asked of potential members was: “Do you have access to any other scheme?” If they answered “no”, stakeholder would automatically be the best choice for them, in terms both of value and simplicity. Following intense lobbying by, among others, the life industry, the cap was changed to either £3,600 or the existing proportion of net relevant earnings (17.5 per cent for under 35s, for example) allowed for money purchase contributions, whichever was the higher. This subtle change, presumably made in order for higher-earners to be attracted to the product and, to an extent, offset the cost of those making lower contributions, has in fact had a major impact on the progress of the product so far. While a number of schemes have been set up with the original target market in mind, the majority of plans sold so far appear to fall into one of two categories: policies purchased by high net worth individuals for their dependants; or schemes set up by employers either as re-classified group personal pension (GPP) plans or to replace an existing final salary scheme. While the replacement of defined benefit schemes was probably not quite what the government had in mind, the almost simultaneous introduction of stakeholder and FRS 17 hardly make it a surprising development – especially given current stockmarket volatility and pressure on companies’ profit margins. The stakeholder providers themselves, meanwhile, see little point in expending effort on marketing stakeholder to the low paid, when high earners provide a more lucrative and fertile market. They also already have the savings habit, and so make for a much easier sell. Friends Provident (FP), for example, sees short term growth as being largely concentrated among the better-paid, either through group business that would have been written as GPPs anyway or to high net worth individuals taking advantage of the new tax breaks. According to FP’s head of stakeholder strategy, Paul Stanbridge: “I think the average contribution into our stakeholder plans has been £100 a month, which confirms our belief that in fact these aren’t the stakeholder target market. These are people that would have been buying reasonable quality GPPs.” Furthermore, Stanbridge is not at all sure that the company would want to go out on a limb to recruit much business from the target market, given the charging structure. “Commercially there is very little money – in fact we could lose a lot of money working with that end of the market. I don’t really think they are there as a client-bank to which we could cross-sell significantly, because they don’t have the disposable income.” Given the current picture, financial advisers have an interesting role to play. While the original target market might not have needed sophisticated advice, many of those who have actually bought stakeholder have a history of savings, and may well have existing benefits from previous employers that could be transferred into the new schemes. Their level of contributions may also mean that a broader range of investment options than the standard tracker and cash funds opted for by most (understandably) cautious employers would be appropriate – but this is unlikely to happen without the ongoing involvement of an IFA. This is a point which Kishan Herriotts, a principal at benefits consultant Punter Southall, picks up. He says: “One example is Scottish Widows, which within the one per cent cap has access to five external fund links offering actively managed funds, as well as its own managed fund. “The providers are able to offer active funds, but where there is no advice being given to individuals, employers tend to restrict the fund choice, so that nobody can say: ‘You gave us access to these funds, which turned out to be inappropriate to our risk profile.’ But we find that by having a greater choice of funds, we can tailor them to the individual’s requirements, in terms of risk profile and when they wish to retire.” Meanwhile, it is generally recognised that two factors are essential to successfully populate a designated stakeholder scheme – employer contributions and the face-to-face provision of information. The importance of an employer contribution is emphasised by the life offices. FP’s Stanbridge describes it as “pretty crucial to getting an sensible take-up rate”. Meanwhile, Adrian Boulding, pensions strategy director at Legal & General, described employer contributions in an internally-published article as “the magic pixie dust that makes stakeholder fly”. Commercial life offices are not, however, the only stakeholder providers. Building and Civil Engineering Benefit Schemes (B&CE) is a non-profit making organisation that operates “Easybuild”, the country’s largest stakeholder scheme, with 170,000 members. Exceptionally, almost all its members fall within the government’s target market – manual workers earning a moderate wage, who have so far made little or no provision for their retirement. Employers generally make a nominal contribution of around £10-20. To be eligible employees do not even have to make a contribution themselves – just fill in an application form. Despite this, according to B&CE deputy chief executive John Jory, many eligible employees simply do not get around to applying. He finds that the best way to sign up new members is actually to visit the workplace and give a plenary presentation. Jory does not believe that investment advice is either necessary or appropriate, given the profile of the members and the simplicity of the scheme, which consists of a tracker and a cash fund, with automatic lifestyling. Indeed, he believes that his members could be put off by the thought of seeing an IFA. He explains: “I think you’ve got to look at the type of customer that we’re after, and they may not feel totally comfortable with going out seeking independent financial advice. That’s not a criticism of IFAs in any way, but we’re talking about the guys that you see working on a building site. We find they are far more comfortable listening to us talk about our stakeholder pension in a group environment.” The trouble is, however, that the vast majority of employees of companies that have nominated a stakeholder plan do not even have this opportunity. Anecdotal evidence suggests that most companies just pin up a leaflet on the company noticeboard and leave it at that – they certainly don’t go as far as to make a contribution. The latter point may change in future. Mike Brooker of IFA firm Momentum expresses the belief that the government will make employer contributions to stakeholder compulsory within a few years. This is a point with which Punter Southall’s Herriotts also concurs. The advice question is likely to remain, however. At the moment stakeholder schemes are set up in one of a number of ways. The most basic is for the employer to work directly with the provider – often designating the scheme, but doing little or nothing to promote it. The second is to use an IFA to help select and set up the scheme, but then to leave the recruitment of members to the provider’s sales force. In this case, the initial outlay involved in hiring the IFA means the employer is more likely to show some commitment to the scheme. Under the third model, an IFA is involved in both the designation and the population of the scheme. In this case, it is usual for the adviser simply to provide “information” rather than “advice” on the scheme. Documentation is given to the employee, who can then go away and decide whether or not to apply, and how much to contribute. In some cases, however, a more comprehensive service can be given, in which employees undergo a full fact-find, and IFAs are bound by the principles of best advice to ensure that the stakeholder is the best option for that individual, and that contributions are made at an appropriate level. Such advice, of course, has to be paid for – and if the employer funds it then, as FP’s Stanbridge points out, the employee is taxed on it as a benefit in kind. The competitive nature of the life market, however, means that even within the one per cent charging cap, the more financially strong offices are willing to offer commission to IFAs. This, according to Herriotts, can enable full advice to be given. If further market consolidation reduces competition, however, such commissions could be under threat. It goes without saying that it is early days yet for stakeholder, and whether advice becomes a significant hot potato will depend on how things progress. For the government’s target market, it may not be such an issue. But if closures of defined benefit schemes and their replacement with stakeholders continue at their current rate, then the intricacies of benefit transfers, the plethora of annuities on the market, and the desire of relatively sophisticated investors to have that sophistication reflected in their pension options might raise the status of advice from a luxury to a necessity.
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