21 Nov 2012
1 October 2012 marked a milestone in pension history. Not only is it the start of a new age of automatic enrolment; it may also be the end of an era for stakeholder pensions. From this date, employers no longer have to designate a stakeholder pension scheme for their employees.
Stakeholder pensions will continue to exist and most stakeholder regulations, such as the charges cap and information provisions, haven’t changed. Employees who have direct payment agreements (DPAs) in place with their employer before 1 October 2012 aren’t affected.
But from 1 October 2012 it all changes for new employees and existing employees who hadn’t previously chosen to join the designated stakeholder scheme. Employers no longer have to make stakeholder schemes available to these individuals. Effectively this means they won’t have to give access to pension saving until their automatic enrolment date - which may be two, three or more years away. This means that employees who want to do the right thing and start saving early will need to find their own pension saving vehicle and it may be difficult for theme to access advice to do this. It’s far simpler to make pension savings through the workplace.
These changes also apply to employees who stop paying regular contributions, or who withdraw their DPA request.
Of course the big difference under automatic enrolment is that employers have to pay compulsory contributions for employees who don’t opt out of pension saving. There’s no such requirement under the stakeholder regime. As a result there are hundreds of thousands of empty stakeholder schemes where there are no members and no contributions – so-called ‘shell’ schemes. Arguably the removal of stakeholder designation is simply a continuation of the current pension savings gap as many employers don’t contribute to stakeholder schemes.
Between now and 2017 every single UK employer will have to select a pension scheme and start auto-enrolling their eligible employees. Some employers may be tempted to use their existing designated stakeholder scheme to meet their new responsibilities. Although AEGON has withdrawn its designation facility for the future, existing stakeholder schemes can be used for automatic enrolment, but they don’t fit well with the RDR.
The FSA quite rightly allows pre-RDR group schemes to pay commission on new entrants as well as on contribution increases. This allows continuation of ‘good’ schemes, without replacement by a new scheme with potentially lower statutory contributions. However, a shell stakeholder scheme can’t be classed as pre RDR even if it’s set up before the end of 2012 - if no contributions have been made.
The stakeholder price cap is set to stay. But it doesn’t work well with adviser charging or consultancy charging in the new RDR world. Advisers will set their charges independently of the product charge, meaning it’s impossible to be sure the total charge would be below the price cap.
Ideally employers shouldn’t wait until their staging date to set up a good pension scheme for their employees. If they wait, they may find there’s a shortage of advice, so they may find it advantageous to bring forward their staging date; and at the same time help their employees reduce their pension savings gap.