Unions help launch government stakeholder pensions

In January 2001, the UK government launched a campaign to promote "stakeholder pensions", which come into force in April 2001. The Trades Union Congress, in endorsing the scheme, has entered the pensions market in a bid to improve pension provision for its members. While doubts still remain about the take-up of stakeholder pensions, this marks a new departure in union membership services.

Pension provision has become an increasingly controversial issue in the UK over the past 20 years. First, the relative value of the basic UK state pension has consistently fallen since the Conservative Party government ended the link between pensions and earnings in the 1980s. Second, leading pension companies wrongly advised some 2 million people to transfer from occupational schemes into personal pensions between 1988 and 1994, with subsequent compensation costing the industry an estimated GBP 11 billion (UK9711181N). As the government has become increasingly concerned about the cost implications of the ageing population, large numbers of people are worried about how adequately they will be provided for after retirement.

One of the biggest issues for government and the unions has been the large numbers of people without an occupational pension. In a 1997 report, Looking forward to retirement?, the Trades Union Congress (TUC) proposed new forms of pension to the government (UK9710172F). After widespread consultation, the current Labour Party government launched its "stakeholder pensions" campaign in late January 2001.

Stakeholder pensions

Stakeholder pension schemes (SPSs) are intended to provide low-cost, flexible pensions for those who have little, if any, pension provision, especially low earners, workers in temporary or insecure employment, and those without work. This essentially means people who cannot join an occupational pension scheme and those in part-time or temporary jobs who are the least likely to join occupational schemes, even if they have the right to do so. SPSs can be taken out as a work or private pension scheme, and are available from 6 April 2001. Individuals will use their own money, with tax relief and investment returns, to build up a pension fund to buy a pension from a provider when they are older or retire. By extending these tax benefits, the government hopes to encourage "housewives", carers, part-time workers and even children to start building their pension savings. Stakeholder schemes will be distributed by mutual societies and unions as well as private sector firms.

To encourage widespread take-up, SPSs must meet a number of minimum standards to ensure they offer flexibility, security and value for money. The scheme forces pension companies to ditch their traditionally inflexible, high-charging contracts, accept minimum contributions from just GBP 20 per month, and allow savers to stop, start, increase or reduce their contributions at any time without penalty, or transfer to a new provider without charge. The government has also decreed that, unless certain exemption criteria are met, employers with five or more employees and without an occupational scheme must arrange access to a stakeholder pension for their employees. Employers themselves will not have to join the scheme or contribute towards an employee's fund. Nor will they be responsible for the performance of their chosen stakeholder scheme. Instead, commercial financial services companies will offer stakeholder pension schemes registered with the Inland Revenue and the Occupational Pensions Regulatory Authority (OPRA).

The TUC response

The TUC has launched its own SPS in response to the government's proposals. This was the first to be announced and is one of the largest schemes. TUC general secretary, John Monks, said: "Our goal is to ensure that the TUC stakeholder pension scheme is ... the one against which other stakeholder pension schemes will be judged ... [It] means that we can offer working people and their families access to a decent, value for money pension". It offers members:

• a pension on retirement between the ages of 50 and 70;

• a tax-free lump sum of up to 25% of the fund;

• starting contributions from as little as GBP 10 per month;

• the flexibility for members to take their pension from job to job without penalty; and

• trustees to ensure that members' interests are put first.

The scheme costs members 0.85% per annum in charges, against the government maximum of 1%. It offers a choice of five investment options or types of stakeholder - three products arranged by the Prudential and two by Standard Life. Several extra benefits of the TUC scheme are claimed to be unique. These include: an option for young people to save initially in an Individual Savings Account (ISA) with the savings transferred subsequently into an SPS; payment protection to protect members' benefits if they are too sick to work or are unemployed; and life assurance. Payments to dependants are irrespective of marital status or sexual orientation. It also offers an ethical investment option.

In support of its initiative, the TUC mounted eight regional stakeholder pension "roadshows" across the country in February 2001, where employers and union officers were invited to attend for free to find out about stakeholder pensions, employers' legal duties and how unions and employers can work together to choose the best stakeholder pension scheme. Most unions, including the two largest, Unison (the public sector union) and the Transport and General Workers' Union, are likely to encourage members without occupational provision to join the TUC scheme. However, other unions, such as the Amalgamated Engineering and Electrical Union and the Broadcasting, Entertainment, Cinematograph and Theatre Union, are offering their own stakeholder pension in competition with the TUC's.

Commentary

Government research shows that two out of five working people do not have a pension other than the one provided by the state. The TUC and individual unions' active endorsement of stakeholder pensions reflects their desire to see a cheaper, decent pension for all working people and those outside the workforce. Before the welfare state, millions relied on unions and friendly societies to give them financial security. That these bodies want to be leading players in the provision of stakeholder pensions reflects a form of return to their roots. However, unions see SPSs as only a partial response to pension problems, demanding a restoration of the state pension's link with earnings. Indeed, in September 2000, the general secretary of the GMB general union, John Edmonds, ventured that pensions "had become [the government's] biggest electoral liability". Nonetheless, the unions believe that participation in SPSs might enhance their own relevance to workers, as well as redefine their relationship to employers and the state.

Through SPSs, the TUC is targeting over half a million trade unionists who work for an employer with no occupational scheme and who never before have had the opportunity to save for a cost effective pension. A further 5.5 million trade unionists earning less than GBP 30,000 a year will be able to use a stakeholder pension to top up their existing occupational pension. Many more workers outside occupational schemes are also not union members, and may become interested in joining through involvement in the TUC scheme. It is estimated that some 250,000 employers will have to set up schemes for around 5 million staff, or face fines of up to GBP 50,000. Many of these firms might be attracted by the offer of "partnership" with the TUC. However, the Confederation of British Industry has said that, while the government has got the principles right, some of its proposals would put an unreasonable administrative burden on small companies. It is also opposed to employers choosing a stakeholder scheme for their staff where their company does not have its own occupational scheme; it believes that each employee should choose his or her own.

So far, awareness of SPSs seems low amongst the key target groups, and a recent survey by Prudential suggested that many employers intend to ignore the new scheme. Significantly, some pensions experts warn that it is the wealthy rather than the less well-off who could benefit the most from stakeholder pensions. Even the minimum monthly contribution required by most stakeholder plans will be beyond the pockets of some. Meanwhile, the wealthy can use their GBP 3,600 personal stakeholder allowance to reduce their tax bill. They can invest money on behalf of their non-working spouses and children, and claim tax relief on their contributions. Unless current rules change, the money low earners put towards stakeholder pensions could end up depriving them of state support such as housing and council tax benefits. Further, as stakeholder pensions are personal pensions, the contract is between the employee and the provider, so an employee bears much more of the risk compared with company schemes where the employer takes responsibility. Few stakeholder plans currently offer "with-profits policies" that smooth the highs and lows of stock market investment by paying retained annual bonuses.

These findings may concern not just unions but the government which sees the stakeholder pension as one of its big welfare reform ideas. Significantly, most experts anticipate that it will eventually become compulsory for most people to take responsibility for incomes in retirement. By joining in the SPS project, the unions risk being identified with what might come to be seen as the effective privatisation of pensions. More positively, their involvement has stimulated debate about the forms of pension that best suit those in greatest need of support, and may reinforce union efforts to appeal to those beyond their core constituency. (J Parker, IRRU)