Pensions: The stakeholder plan - solution or problem?

Pension provision in this country is facing a radical overhaul. At the heart of the changes will be the Prime Minister's big idea, the stakeholder pension, which it is hoped will address the failings of the system. Tony Bonsignore looks ahead to see what it means for all of us.

The Government claims, with good reason, that many people are failed by the current system, especially the low-paid, those with intermittent earnings and women in general. It argues that they have fewer opportunities to build up any substantial pension funds and that personal pensions often prove too inflexible and prohibitively expensive for them.

The framework for stakeholder pensions was set out in a consultative document issued by John Denham, the pensions minister, at the end of last year. This listed some of the key features that the Government expects them to include when they are eventually introduced.

We now know that stakeholder pensions will differ from personal pensions. They will be multi-member, which means that some schemes may be open to a particular occupation or industry. Others are likely to focus solely on the self-employed and contract workers, while regional schemes are another possibility.

The Government is prepared to award "kitemarks" to the best schemes to increase their popularity. To obtain this seal of approval, a pension plan must meet a range of criteria, including low charges, flexibility and security.

But before any of this becomes reality, the Government must answer the fundamental question - who will sell stakeholder pensions. Trade unions, retailers and employers are all being invited to suggest ways in which they could contribute to the new scheme. However, it is today's established pension providers, who have both the resources and the expertise, that are most to likely to provide, if not actually deliver, the service.

And herein lie many problems. For a start, many of these self-same pension providers remain in the doghouse because of their slow progress in compensating victims of pensions mis-selling and are being threatened by the Government with exclusion from the new scheme.

More important, a number of the more traditional insurance companies that dominate the pension industry harbour reservations about the Government's ideas. They are already questioning whether to participate at all in the provision of stakeholder pensions.

Stewart Ritchie, director of pensions development at Scottish Equitable, believes the Government must make contribution to a stakeholder or other second-tier pension compulsory if the scheme is to work, stating that this is the only way it can ensure a big enough take-up. "Not many of the people at whom they are targeted would be likely to put their small amount of extra cash into their stakeholder pension without compulsion," he says.

The problem of cost is also a thorny issue. Personal pensions as they are currently constructed by traditional providers carry high charges because they are relatively expensive to operate, the industry argues. They often carry high minimum investment levels, which takes them out of the reach of people on modest incomes.

Many providers and consumer organisations are calling on the Government to radically simplify pensions legislation in order to slash costs. Roger Sanders, an independent financial adviser, says: "Stakeholder pensions will have to be stripped down to the bare basics if they are to meet the Government's criteria. You can't have fancy extras on a pension plus a low price; the two are incompatible."

According to Mr Sanders, stakeholder pensions could mean a large reduction in the amount of tax-free cash available at maturity as well as the removal of the option for early retirement, two important features of personal pensions as they now stand.

One large pensions company, meanwhile, believes it can cut the time it takes to give appropriate advice to a client from three hours as at present to just 20 minutes if most of the regulations that currently cover personal pensions are dropped. Adrian Boulding, pensions strategy director at Legal & General, says: "This will mean consumers paying around pounds 60 for advice, much less than at present. It's a case of the less we spend on regulation, the more the consumer gets."

In an ideal world, perhaps. But then in such a world, all those selling pension plans would act solely in the best interest of the client and at the lowest possible costs, totally ignoring any commission or payment that they get from the providers. With the on-going review of pensions mis-selling still very much in the headlines, it is likely to be a long time before any government will place such faith in the pensions industry.

Tony Bonsignore writes for 'Financial Adviser'.