What’s at stake?

new stakeholder pension scheme came into force in early April, yet recent
research shows that many employers are still very confused as to their
obligations under the new scheme. Xenia Frostick identifies key areas
concerning the stakeholder tax regime and answers the most frequently asked

Although the stakeholder pension scheme came into play from 6 April this
year, employers have until 8 October to provide access to some form of pension for
their employees. The obligation has been introduced under the stakeholder
legislation and all employers must comply, aside from very small organisations
where there are fewer than five employees. But what are the options available
to setting up a stakeholder scheme?

Keeping current occupational scheme

There is no need to close any existing scheme but it will need to be amended
if it doesn’t meet some minimum standards. A stakeholder pension will not be
needed if these minimum requirements are met.

The scheme must be made available to the following:

– Employees who started work a year or more ago

– Employees aged 18 or over

– Employees with more than five years before their normal retirement date

– Employees earning more than the lower earnings limit (for National
Insurance purposes).

If these rules are not met there are two choices. The scheme can be amended
to meet the requirements, or a stakeholder scheme can be used to fill the gaps.

A scheme that only offers death in service benefits will be enough to
exclude the need to provide a stakeholder scheme, provided it meets these
rules. But it is generally thought this loophole will soon be closed.

Keep current personal pension scheme

If the employer is already contributing to a personal pension scheme a
stakeholder will not be needed if the scheme is available to all employees who:

– Are aged 18 or more

– Are earning more than the lower earnings limit (for National Insurance

– Have been continuously employed for three months

– The contract of employment says that the employer will pay contributions
equal to at least 3 per cent of a member’s basic pay

– Employer’s contributions are paid each time the employee is paid (unless a
longer period has been agreed with the employee)

– The scheme is "stakeholder-friendly", because there are no
penalties for transferring out or stopping contributions

– There is either no obligation for the employee to contribute or, if
employees are required to contribute, a stakeholder is offered as well.

– The employer provides a payroll deduction facility for employees’

There are a few relaxations in these rules for staff who were already
members on 8 October 2001 when the stakeholder rules will come into force.
There is no need for the employer to pay matching contributions up to 3 per
cent and the scheme need not be "stakeholder-friendly".

Designate a stakeholder scheme

This option is compulsory for all employers who can’t use one of the above
options. In this case they must designate a scheme for all staff who meet the
following criteria:

– They are aged 18 or more

– Are earning more than the lower earnings limit (for national insurance
purposes) and

– Have been continuously employed for three months.

What has to be done if an occupational pension scheme is kept?

Nothing has to be done – but there are some complicated tax options for the
brave hearted.

What has to be done if a personal pension scheme is kept?

There are new rules about how and when contributions have to be paid. All
contributions must be paid by the 19th day of the month following the month
they were deducted. Thus, contributions deducted in June have to be paid to the
provider by 19 July. The provider (for example, the insurance company providing
the scheme) must make a report to Occupational Pensions Regulatory Authority
(Opra) if contributions are not paid on time. The provider also has to report
payments that are over 60 days late to the members directly.

Employers will have to have a written agreement with the provider, known as
a "direct payment arrangement". It must set out the amount of each
member’s contributions, the amount of employer’s contributions for each member
and the date on which each is to be paid. The idea is the provider can check
that all payments are correct.

The payment date should be well ahead of the new statutory deadline (on the
19th of the month) so that any queries can be resolved in time. The only
realistic way to do this is to prepare a monthly schedule. An example of what
Opra expects can be found in its note 8, available from Opra (telephone number
01273 627600).

What has to be done if a stakeholder is to be designated?

The employer does not have to set up a stakeholder or sponsor one, although
there are ways of doing this if the employer so wishes. Nor does it have to
recommend one. All the employer has to do is consult with the staff and then
designate a scheme. It is up to each employer to decide what is meant by
"consultation" because there are no regulations or guidelines on the

Before designating a scheme the employer has to check that it is registered
with the Pensions Registry (run by Opra) as a stakeholder scheme. If a scheme
loses its stakeholder status the employer has four months to designate another
scheme. Opra suggests employers should check registration at least once a year.

Once a scheme has been designated, the employer must provide the employees
with enough information to contact the scheme provider. This will usually be an
insurance company, bank or something similar. The employer must also allow the
provider reasonable access to the employees as it will want to provide them
with more information about the scheme.

The employer must also offer a payroll deduction facility for employees.
This brings with it certain disclosure requirements. A notice has to be sent to
an employee within two weeks of a request to start, vary or stop contributions
to the scheme.

The notice must set out the rules for using the payroll facility, including
how requests should be made and how often they can be made. Employers may limit
changes to one every six months, provided a member can stop contributions at
any time. All valid requests must be put into effect by the following pay

The employer will also have to set up a "direct payment
arrangement" as described above, under personal pension schemes and will
have to comply with the deadline for paying contributions to the provider. In
its turn the provider has the same obligations to inform Opra and the members
if payments are late.

The one thing the employer does not have to do is contribute to the scheme.

Penalties for non-compliance

There are penalties for employers who do not provide access to a stakeholder
scheme; do not make the payments on time or keep a proper record of payments.
The penalty is a fine of up to £5,000 for an individual and £50,000 for a
company. Opra also has the power under the Pensions Act 1995 to disqualify
trustees in addition to, or instead of fining them.

It is also a criminal offence to knowingly be involved in the fraudulent
evasion of the direct payment arrangements

Advantage of stakeholders

It is hoped that these new requirements will help more people provide for
their own retirement. The old personal pension schemes were seen as inflexible,
expensive and difficult to understand. They were inflexible and expensive
because they had financial penalties if a member stopped or varied his
contributions and if a member asked to transfer to another scheme. In addition
they usually imposed heavy charges in the first few years, and the way charges
were deducted was often complex and difficult to understand.

The new stakeholder regime is supposed to avoid these disadvantages. In
order to qualify for stakeholder status a scheme must have the following

– It may not charge more than 1 per cent per annum of the value of the
member’s fund

– Benefits must be money purchase

– It may not require contributions of more than £20 or that they are paid
with any frequency

– It must have a default investment option

– It must accept transfers in

– It cannot impose exit charges for transfers out.

Disadvantages of stakeholders

There are a number of disadvantages to stakeholder pensions, that might
better be described as dangers. These include the following:

– Members not having enough money to buy an adequate pension

– The product being limited in the facilities and investment options it can
offer, and

– Individuals may not buy the right product for their needs.

Members will not have an adequate pension unless they save regularly for
most of their working life. A number of tables have been produced recently to
illustrate this.

One reason personal pensions had such high initial charges was that members
simply stopped contributing after the first few years. The high initial charges
allowed the provider to recover most of their costs when this happened. This
was tough on the member but it highlights the problem.

If stakeholder members drop out in the first few years, two things may
happen. The provider will not cover their costs and the member will not have
enough to buy an adequate pension.

The key is to get members to make a long-term commitment. If they did, some
insurers have claimed the charges over the whole life of the pension would be
cheaper with a personal pension (where charges tail off at the end) than with a

The higher charges also allowed the providers to introduce other benefits.
These include a more actively managed investment fund, premium waiver insurance
and even financial advice. On the whole, advice was paid for out of commission,
which was recovered from the member (by the charging structure) in the first
few years. These options are less likely to be available under stakeholder
schemes where charges are fixed at the annual 1 per cent level.

Decision trees have been produced to replace the missing advice, but it is
yet to be seen how easy these are to use and, perhaps more importantly, whether
they give good advice in the long-term. Remember, anyone who is uncertain about
how much they can save should take into account such things as the amount they
would receive under the minimum income guarantee.

Early research has indicated that many people in the target group cannot
afford to save or cannot afford to lock their money away in a product that
cannot be accessed on a rainy day. It now seems that those wanting personal
advice will have to pay extra for it.

What next?

It is never too soon to start planning because of the penalties for those
that miss the deadline. Many employers will want to look at matters in more
detail and take legal advice before a final decision is made. Each employer
will have different employment needs but from now on the solution will have to
include some form of pension provision.

Xenia Frostick is a pensions expert at Speechly Bircham

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