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What
about us?
AVCs for above £30,000 earners
will remain, but what about those earning less than this figure?
Mike Spink highlights what employers need to consider with group
stakeholder plans
For
employers with occupational pension schemes (OPS), the stakeholder
issue has been something of a stop-start affair.
For most of last year, stakeholder was allowed to slip down the
pending pile. The release of further information concerning partial
concurrency for OPS members brought the issue back into focus. However,
a rumour concerning a possible Inland Revenue announce-ment regarding
amendments to additional voluntary contribution (AVC) cash commutation
rules, put the issue back on hold.
AVC
v group stakeholder
AVCs will still be required to be offered under all occupational
arrangements and will (apart from free standing plans) remain the
only route for voluntary contributions for members earning above
£30,000 per annum.
The key areas to be examined by employers considering implementing
a group stakeholder plan (GSP) for their below £30,000 earners
include charges, cash commutation, flexibility and investment choice.
Charges
The majority of trustees offering money purchase AVC facilities
will look to the bundled (or packaged) product market to make or
review their purchase. It is this market that will see a drop in
AVC charges with the introduction of stakeholder.
The reasons for the decline in charges are easily explained. To
have any hope of seeing some profit arise from their stakeholder
business within the maximum one per cent per annum fund charge,
providers have had to invest significant sums in devising new administration
systems and processes.
Once in place, the next step is to leverage this spending by including
their other defined contribution products on the same platform.
Many trustees should therefore be able to negotiate some reduction
in existing AVC plan charges as the market finds the most efficient
level at which to write defined contribution business, irrespective
of the name on the wrapper.
Cash
commutation
Whilst 6 April this year came and went without change to AVC cash
commutation rules, the latest information to hand suggests that
further news may arrive as early as October.
The Inland Revenue may decide to grant commutation rights to AVCs
invested since April this year. Some employers may therefore wish
to wait for further news before considering whether to implement
a GSP.
Flexibility
For now, stakeholder will hold the higher ground in terms of flexibility.
Whilst AVC encashment prior to normal retirement age will need to
clear the trustees rule amendment and income drawdown hurdles, stakeholder
will allow access to all or part of the cash/pension accrued at
any point from the age of 50.
Investment
choice
The degree of investment choice also currently favours the stakeholder
route. Whilst the inclusion of external fund links will help to
modernise AVC contracts, the degree of choice for members will still
rest with the trustees, where often a conservative approach to the
number of fund options offered, still prevails.
However, the lack of a with-profits option under many of the GSPs
available, may lead some schemes to discount the GSP as a viable
option.
Will
the real purchaser please step forward The GSP purchaser is the
company, rather than the trustees, and will often not be represented
on the trustee body. He or she may well be someone, therefore, with
whom the consultant does not currently have a business relationship.
Once the stakeholder discussion has begun, communication issues
will quickly arise. How will relevant members be assisted with the
stakeholder v AVC decision? Should the employer now become the provider
of generic investment information, providing details of non-pension
savings routes?
If nothing else, stakeholder and partial concurrency may yet help
ensure that the financial education that defined contribution members
will increasingly need, becomes a reality.
Mike
Spink is a principal at Aon Consulting Ltd
–
Pensions Age June 2001–
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