LONDON - A proposed revamp of U.K. pension rules could push many employers to ditch their pension plans in favor of new, cheaper "stakeholder" plans.
Highly touted by the Labor government, the new stakeholder schemes are designed to provide a funded defined contribution pension for 5.3 million middle-income Britons lacking an employer-sponsored plan.
Officials at Liberty Pensions, London, a defined contribution provider, predict a wholesale shift by employers - except for the largest companies - and the self-employed to stakeholder pensions, and away from defined benefit and personal pension schemes. "It's going to be the easiest thing to do for employers," said Phil Christison, head of technical services.
But some pension experts question whether individuals will sock away enough money without forced contribution levels - a point the government rejected, fearing mandatory contributions would be viewed as a tax.
While the long-awaited green paper on pensions says the Labor government supports existing employer-provided pension schemes, experts warn that view is not supported by the fine print.
"The government is making the right sort of noises, but is not providing the details," said Paul Greenwood, research actuary with William M. Mercer Ltd., Chichester.
Employers could go directly from final-salary plans to the new stakeholder plans, said Sheila Longley, a spokeswoman for the National Association of Pension Funds, London.
The government has provided employers, particularly smaller ones, a number of incentives to dump existing retirement arrangements for all or part of their workers. Group personal pensions, an increasingly popular defined contribution option, also would be dealt a body blow by the proposal.
In addition to the cheaper costs of running a stakeholder scheme, potentially mind-numbing complexity of rules on how defined benefit plans opt out of a new, second-tier state scheme and a rewrite of member-nominated trustees election procedures may push many employers over the edge, experts said. Plus, the new plans offer lighter levels of regulation. And the proposed changes come shortly after employers have just finished complying with the massive requirements of the 1995 Pensions Act.
"Little things like that are constantly chipping away at occupational pension schemes," said Martin Slack, senior partner in the actuarial firm of Lane, Clark & Peacock, London, and chairman of the Association of Consulting Actuaries.
However, some experts think the effect on employers will not be severe. Andrew Warwick-Thompson, a partner with Bacon & Woodrow, London, said: "I don't think there's sufficient burden in this for people to say, 'I've had enough.' "
Added John Demaine, managing director and head of product development at Barclays Global Investors, London: "It's a little bit early to make any assessment" of how many employers will switch to stakeholder plans.
NEW STAKEHOLDER PLANS
The government's policy, announced Dec. 15, would enhance state benefits to lower-paid workers and encourage moderate-income workers not covered by existing plans to join stakeholder schemes.
The government would create a new, second-tier state pension, doubling the benefit level now paid for a worker earning 9,000 pounds a year under the State Earnings Related Pension Scheme, which the new plan would replace. Those earning between 9,000 pounds and 18,500 pounds a year would receive more modest increases.
Given falling state pension benefits, one-third of British retirees would receive inadequate benefits by 2050 if no changes were made, according to projections.
The proposal also would authorize privately run stakeholder plans, available to individuals not participating in employer-sponsored schemes or personal pension plans. The idea is to expand pension coverage to 5.3 million Britons not in employer-sponsored plans. (Of these, 2.5 million participate in personal pensions, but about 1 million make minimal contributions.)
Middle-income workers would receive enhanced rebates from the state system to pull out of the new State Second Pension and join a stakeholder scheme. Higher-paid employees also could use the schemes if they lack other pension coverage.
While participation would be voluntary, the underlying message is that the government anticipates workers earning between 9,000 pounds and 18,500 pounds a year would switch to the new, privately managed plans. The first stakeholder plans - which are expected to take the form of defined contribution vehicles - are expected to be up and running by April 2001. Over the long run, government spending on pensions would drop to 40% from 60% now, said Alistair Darling, social security secretary.
Employers that don't provide their own pension plans would be required to provide access to such schemes, and to provide for payroll deductions to such plans. Employers also would have to consult workers or their representatives on the choice of scheme.
Stakeholder plans would be governed by trustee boards, which will set benefits, investment strategies, investment options and other policies. The plans could be formed by industrywide groups, employers and U.K.-regulated financial services companies.
As expected, fees would be capped at a percentage of other assets under management or contributions, at levels to be set later. Fees will cover all operating costs. Tax-deductible contributions will be capped at 3,600 pounds ($6,012) a year.
The importance of brand names and caps on fees could lead to more distribution linkups and greater use of passive management, noted Andrew Kirton, senior investment consultant at William M. Mercer Ltd., London.
The proposed rules developed by the Department of Social Security might be the last straw for some employers with existing retirement plan arrangements. Most employers opt out of SERPS, the second-tier earnings-related state pension plans. But it is far from clear how the proposed State Second Pension, designed to replace SERPS over time, will work for employers who contract out.
Mercer's Mr. Greenwood said it appears rebates will be based on a combination of age-related and earnings-related factors, resulting in a complex formula that may be a burden on payroll departments.
"One must have doubts that even the DSS can administer it themselves," he said.
In addition, the proposals would alter the procedure for picking employee trustees - known as member-nominated trustees - and require larger pension plans to have a retiree representative. Under an "opt out" rule implementing the 1995 law, most employers were able to keep their existing trustee boards, sidestepping a requirement that at least one-third of trustees be employees. But the government proposes eliminating this exemption.
One potential plus: government officials are contemplating whether employers should be allowed to require participation in a company pension plan as a condition of employment. This obligation was abolished in 1988 by the Thatcher government, and employees increasingly have been declining to join employer plans.
However, the government still might permit employees to opt out of employer schemes, as long as they could prove they had equivalent retirement arrangements elsewhere. Comment on this and other proposals are due by March 31. Comment on a separate proposal, embodying pension-rule simplifications, is due by Feb. 12.
In another key decision in the paper, government officials rejected ideas to require additional retirement contributions. Peter Murray, chairman of the NAPF, said in a statement: "The NAPF acknowledges that compulsion is a difficult political issue, but our professional experience suggests that unless you compel those who can save to do so, they won't. In the absence of compulsion, we doubt whether enough people will make adequate pension contributions."
GROUP PENSIONS HIT
The proposal also casts a shadow over group pension plans, which have been gaining in popularity as alternatives to traditional defined contribution vehicles. Use of GPPs shot up to 15% from zero during the past year, according to a survey by Phillips & Drew, London.
GPPs would not qualify as occupational schemes or as a substitute for stakeholder pensions: they lack boards of trustees, which could fire the money managers who now sponsor the vehicles, Mr. Slack said.
Mr. Greenwood added GPPs carry higher expense ratios - often between 15% and 20% of contributions on a compounded basis - than is likely to be allowed for the stakeholder plans.
The big loser under the paper, Bacon & Woodrow's Mr. Warwick-Thompson said, is the insurance industry, which had lobbied heavily for a personal pension-type structure. Instead, the government chose a trust-based structure. Insurers "will find this a very difficult cultural change and will have to rethink their strategies," he said.
But John Glendinning, director of pensions development at Scottish Amicable Life PLC, Stirling, Scotland, said, "I don't think it will work against insurers."