Personal Finance: It's your future that's at stake

Stakeholder pensions are seen by the Government as a way of addressing the changing labour market, but experts disagree.

THE GOVERNMENT'S plans for a stakeholder pension regime risk wrecking many people's retirement planning because it has misunderstood the labour market, according to Ann Robinson, the director general of the National Association of Pension Funds. The Government's core assumptions, she says, are "in many cases misleading and in some cases simply wrong".

At the heart of the plans is the assumption that work patterns have seen a fundamental shift in the past few years. In its stakeholder pension proposals, published last December, the Government warns: "There are fewer people entering work expecting lifetime employment with one or two employers ... More jobs are part-time or on part-time contract".

But an NAPF study conducted by Pamela Meadows, a fellow of the National Institute of Economic and Social Research, found that for those aged between 25 and 50 - the key years for building up your pension savings - job mobility had hardly changed in the past 20 years.

In 1975, people aged from 25 to 34 tended to remain in a job for four years and eight months. Twenty years later, the figure was four years and four months. For those between 35 and 49, the typical stay was seven years and 10 months in 1975, compared with seven years and four months in 1995.

The NAPF's fear is that stakeholder pensions could undermine perfectly good occupational schemes that could continue to give a better return. Ms Robinson says: "The Government is a bit confused, I suspect. In its consultation document, it does say probably an occupational pension scheme is always going to be the best thing for you. That doesn't match up with some statements from ministers who have been saying that the labour market is completely different and the occupational pension is not the most suitable vehicle."

The Financial Services Authority's consumer panel raised similar fears in its response to the consultation paper. It warned that many employers would switch from an existing occupational scheme to a stakeholder in order to save money. Ms Robinson wants to see this problem addressed by simplifying the legislation governing occupational pension schemes to put them on a level playing field with the stakeholder.

William M Mercer, an employee benefits consultancy, has a different concern about the proposals. As there is no exemption to exclude even the smallest employers from the requirement to provide access to a stakeholder scheme, they may have to find their employees a scheme and arrange to pay part of the wages directly to the plan manager - even if they only employ one person earning above the stakeholder's lower earnings limit of pounds 66 a week (gross).

Wendy Beaver, a consultant with William M Mercer, says: "If you've got an employed relationship with a nanny or a cleaner, then you will have to provide access to a stakeholder pension. Your employee can then say they would like you to pass over their contributions direct, and you have to provide a payroll facility to do that."

William M Mercer is calling for employers with fewer than six employees to be exempted.

A Department of Social Security spokesperson said: "There is no suggestion that occupational pension provision needs to be altered because of changes in the labour market. The Government's aim is to help those who do not have the opportunity to join an occupational scheme. This group includes many millions of self-employed people and low earners who may not be in a position to join a private pension scheme. Stakeholder pensions will give them, for the first time, access to a secure, flexible and good-value pension."

STAKEHOLDER PENSIONS - THE PROPOSALS

Stakeholder pensions are to be up and running by April 2001.

Targeted at the 11 million Britons who earn between pounds 9,000 and pounds 20,000 a year. About 3 million of the people in this group have no occupational pension or personal pension.

Maximum charge to be set at 1 per cent of fund value per year.

Minimum contribution must not exceed pounds 10. No minimum frequency for contributions.

No penalties to be imposed for interrupting your contributions.

Employers with no occupational scheme must ensure workers have access to a stakeholder scheme. This includes arranging for contributions to be deducted from pay. Employers with a good group personal pension scheme may be exempted.

Tax treatment has yet to be finalised. Contributions to stakeholder schemes look like getting tax relief on the way in. Investment income and capital growth within the scheme will probably be tax-free.

On retirement, stakeholder members are likely to get a tax-free lump sum and taxed pension payments.

Maximum contributions are likely to be limited to pounds 3,600 a year, or 100 per cent of the individual member's earning, whichever is the lower.