FOOL'S EYE VIEW
Sell That Stakeholder!

By Stuart Watson (TMFTiger)
April 9, 2002

The stakeholder pension celebrated its first birthday over the weekend. The initial consensus view is that its success to date has been limited, as only around 750,000 policies have been taken out. That seems quite a lot to me, given that the system has only been going for a year and companies were not obliged to offer them until last October (and many of them still haven't got round to it). Many of the policies may just be personal pensions that would have been taken out anyway, so measuring the additional take-up due to the new scheme is difficult. Apparently, less than half of the stakeholders taken out so far were by low- and middle-income earners, the target for the new scheme.

Cool for CATS

A stakeholder pension is essentially just the equivalent of a CAT-standard pension. Perhaps that is part of the problem. Rather than appearing to create (yet another) financial product for us to worry about, attention should have been focused on simplifying the current set-up instead. The political motive of being seen to do something different from the other guys is sadly considered to be more important than doing something properly. I've been watching too many Yes Minister re-runs recently, you see.

The stakeholder pension is an attractive product being both flexible and cheap, two of the main attributes us Fools like to see. With the charges capped at 1%, not only does it make pension provision cost-effective at lower contribution rates, the stakeholder is acting as a spur for the pension industry to lower its charges on other products too. However, no matter how good a financial product is, no one is going to buy it if it's not marketed properly.

Seeing Red Tape

The marketing 'sell' has to be made to both individuals and the companies who offer them to their employees. Many small companies have found the prospect of yet more paperwork too off-putting. Marks & Spencer Financial Services produces a quarterly 'Stakeholder Barometer'. In January, they reported that 47% of businesses thought the process was or might be too arduous. And only 40% of companies contribute amounts in addition to the employees' own payments.

Here at the Motley Fool, we didn't find it overly onerous to get our scheme set up. Resident finance Fools, TMFNumbers and TMFSymphony, said that most of the work is done by the stakeholder providers themselves and the ongoing work required is pretty minimal once a scheme has been chosen.

Combined Statements

In order to keep up the interest in stakeholders, the Government hopes to introduce the Combined Pension Statement. This will be sent out by companies to their employees and will contain forecasts for both the State and private pensions. The idea is to shock people into action and it is hoped some 15m people will get these statements by the year 2005.

An article in the Financial Times yesterday suggested the initial reaction to trials for this statement were disappointing, with few people reviewing or increasing their pension contributions as a result. However, much like the stakeholder itself, it will take some time for such policies to take effect. Hopefully, the nasty truth of how little you might retire on will loom a little larger each year. Eventually, we'll see the need for action. In fact, this sort of statement sounds like an excellent idea, as long as the forecasts are clearly presented. Anyone who has tried to read a private pension statement will be well aware how complex these can be.

Should you get one?

So should you get a stakeholder? Most of us do not save enough for our retirement. The State Pension and even the Second State Pension (that has now officially replaced SERPs) will leave most people shy of what they need. So whether it is via a stakeholder, another sort of pension or even an ISA, we do need to save something.

Often, retirement saving is something that people will put off, thinking that they can't afford to do it at the moment. However, any delay will actually mean it costs you more to get the same level of retirement income. For example, £100 a month growing 4% over 40 years gets you to the same final pension pot as £170 a month over 30 years and £320 a month over 20 years. So, in this example, it costs you 60% more in total contributions if you save for just 20 years rather than 40. In truth, it's probably more accurate to say you can't afford not to save for your retirement now.

For more on stakeholders and other types of pension, visit our new and improved Pension Centre