A stake in the future

And now - what the financial industry really thinks about stakeholder pensions. By Paul Slade

It was bound to happen. First the praise, then the brickbats: barely three months since the Government published its proposals for a new "stakeholder" pension scheme - to, at the time, near-universal approval - and already the plans have come under fire.

Critics are claiming that stakeholder pensions would be a "hugely wasteful" regime with "massive unnecessary costs" for savers.

Consumer groups and pension providers see parallels with the pensions mis-selling scandal of the late Eighties. Then, thousands of workers were wrongly told to opt out of perfectly good occupational schemes for far inferior alternatives.

An independent consumer panel at the Financial Services Authority, the City's leading watchdog, warns: "It is important that employees are not encouraged away from existing occupational schemes by employers playing on the simplicity of (stakeholder) schemes and the `halo' effect of Government sponsorship."

According to the Government, stakeholder pensions will be targeted mainly at the 11 million UK workers who earn between pounds 9,000 and pounds 20,000 a year, only about half of whom already have an occupational pension. The proposals aim to provide a "secure, flexible and value-for-money" savings option, which the Government wants up and running by April 2001.

However, Andrew Black, pensions marketing manager at Standard Life, a leading pension provider, says he does not want to see people automatically switched out of company schemes into stakeholder ones: "A lot of the problem in the late 1980s was generated by the fact that too many people opted out, and we want to avoid that happening again."

Axa Sun Life, another insurer, adds: "The consultative document could be interpreted as encouraging switching of existing pension arrangements to stakeholder [schemes]. We believe it would be hugely wasteful if this were the outcome. In many respects, existing schemes are likely to offer better value than stakeholder."

Axa bases its worries on an aside in the Government's consultation paper saying that the pension indistry will be expected to "facilitate transfer into stakeholder pension schemes".

Tony Tollerton, Axa's senior technical manager, fears many more people than the Government intends will respond to this encouragement by opting out of occupational schemes without realising they could lose out.

The FSA consumer panel is worried that many employers would use the switch from occupational schemes to stakeholder pensions as a way of cutting their own costs. Employers have to contribute to their workers' occupational schemes, but would not have to do so with stakeholder pensions.

The FSA panel is calling on the Government to fight the danger of mis- selling through a consumer education campaign which talks about all the different types of pensions available, not just stakeholder schemes.

Barbara Saunders, who chairs the panel, says: "They need to empower consumers to make informed choices, and that requires better education and better information."

Axa wants to see yet another category of pension introduced to protect these workers. These would not be stakeholder plans, but would have low enough charges to be certified as "stakeholder-friendly".

Mr Tollerton says: "What would happen in practice is that every single pension at these levels of earnings would be either a full stakeholder, or stakeholder-friendly".

Standard Life agrees there is a danger of people moving wrongly into stakeholders, but its own concern is for those in group personal pensions rather than occupational schemes.

Employers who already offer an occupational scheme to all their employees need not give them access to a stakeholder alternative. But no decision has yet been made on an equivalent exclusion for group personal pension schemes.

Standard Life believes this omission "could result in massive unneccessary costs", as people transfer out of group schemes for no good reason.

As a mutual, Standard Life is owned by its policyholders, who Andrew Black says would have to bear these extra costs. At Axa, Mr Tollerton says the costs of the waste he refers to would also ultimately fall on savers.

Standard Life adds: "Some employees will receive better benefits from group personal pensions than from some occupational pension schemes. It would clearly be illogical not to provide an exemption for such good schemes."

"Good" group personal pensions, it adds, should be defined as those with low enough charges to meet the stakeholder standards. But this test would come only "after a reasonable transition period, such as three to five years."

This issue of advice also concerns many pension experts, who say the lack of help in buying a pension under stakeholder rules will further increase the risks involved. Axa believes a charge of no more than 1.5 per cent would be enough to build in the cost of advice to buyers.

But Ms Saunders says most people in the target stakeholder group cannot afford to pay for advice. Instead, she wants to see very basic help made available free through Citizens' Advice Bureaux. "People who just want some help in deciding what sort of route might be appropriate could then go to an informed source to help them through the maze," she says.

Andrew Black, at Standard Life, says: "The concern now is not so much mis-selling as mis-buying: people walking into something without taking advice, and buying something that really doesn't suit them."

Mr Tollerton adds: "The risk of people taking a stakeholder pension without advice - and not realising they've done anything wrong till they retire X years later - is very much there."