IN MY OPINION - Institute of Management companion Sir Peter Davis, group chief executive of Prudential, says that there's no time like today to start saving for tomorrow.
About half of the 22 million employees in the UK can be confident that the pension schemes provided by their employer will help them to enjoy retirement. However, approximately six million adults - some on short-term contracts, others part-time or self-employed - do not yet enjoy access to such support nor pay into any alternative arrangements to fund their own retirement. They will be largely dependent on state benefits. It is these people who are the targeted beneficiaries of the government's proposed new Stakeholder Pension schemes.
The Government hopes to encourage greater individual retirement provision, particularly in the middle-to-lower income range. A number of crucial details about Stakeholder Pensions have yet to be decided, but there is no doubt that good value, transparency and clarity will be essential components.
Underlying the need to save more during one's working life is the fact that people in the western world are living ever longer and will have lengthier and more active retirements than previous generations. This in turn means increasing demand on government resources (tax revenues) unless those who can do so increase their own retirement savings or, in many cases, make a start.
A recent survey by Mintel suggests that many adults do not save for retirement because of their perception that pensions are too expensive. For people with very low earnings, who can only make very small, intermittent payments, this may well be true and apart from their contributions into the state scheme they may be better advised to save via an alternative medium-term product such as an ISA. This should not be the case, however, for most people. Hopefully, by making pensions easier to understand and more cost-effective the Stakeholder reforms should break this perception and encourage more people to start contributing.
From April 2002 employers who do not offer a company scheme to all staff will be required to nominate and provide access (through payroll deduction) to a Stakeholder Pension. While recognising the difficulties that small employers will face in meeting this requirement, it would be disappointing if employers go no further than the minimum required of them, and do not use workplace information to help teach staff about the benefits of starting a pension. We should not forget that pensions are one of the most tax-efficient methods of saving currently available to employees.
Recently the Government announced plans for a single, simpler tax regime to embrace all types of money-purchase schemes including Stakeholder. Individuals will be able to save up to £3,600 a year into a defined-contribution scheme, regardless of earnings. Employers providing money purchase occupational schemes will have the chance to opt into the new system, which will provide a single administrative system for all defined contribution schemes.
Stakeholder Pensions have not caused, but will accelerate, the product and industry transformation which is occurring currently. The launch of ISAs and the proposals for Pooled Pension Investment reflect a trend towards collective investment products such as unit trusts, and the advance of e-commerce has already altered distribution patterns for all products.
Stakeholder Pensions will no doubt cause a shake-out in the industry over the coming years.
Many people will also want access to advice on the suitability of products.
The Government has stated that Stakeholder Pensions will be subject to a maximum annual management charge, intended to cover (among other things) the cost of basic information and generic advice. For a further fee it should, however, be possible for people to obtain additional personalised advice. Stakeholder Pensions' simplified charging structure should also make straightforward comparisons across schemes much easier.
In an ideal world Stakeholder Pensions should build on, rather than replace, good company schemes. Company schemes have built-in employer contributions offering significant benefits to members. Following the relaxation of the requirement on employees to join company schemes in 1988, too many people have failed to take up this important and valuable option. Stakeholder Pensions should also build on the new breed of Group Personal Pensions (GPPs) that already meet many of the features expected from the Stakeholder proposition.
The introduction of Stakeholder Pensions will change radically the future structure and distribution of private pensions, with many of the people currently unable to access an occupational scheme encouraged to save through new value-for-money products. As well as making products easier to understand, more affordable and more readily available, educating people on the essential significance of setting up a pension has to be the priority for the next few years. The creation and management of Stakeholder Pensions is a challenge to which the industry must rise. Those companies with the capital, experience, size and technological resources will do so successfully, helping to ensure that the financial health which so many of us in occupational schemes enjoy is extended to a much greater number of future pensioners.