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Are there any oddities in the rules?

Well, a couple spring to mind. There is no lower age limit for stakeholder, so you can buy one for your children (who would be credited with basic rate tax); and the upper age is limit is 75. The significance of that is that, for example, if all of a company's employees are over state pension age and in receipt of a pension, the employer is not exempt but will still be required to facilitate a stakeholder scheme for them!  

The company scheme does not appear to satisfy all the criteria, what should I do?

It is a company issue, but many companies look to their trustees as a sounding board. Talk to your advisers as soon as possible.

My occupational scheme covers all my employees, Need I bother to look at stakeholder?

Yes. Stakeholder compliant products could prove to be a useful source of AVG provision. Charges may well be lower than your existing AVG facility and there are tax differences. In addition, employees earning less than £30,000 can take out a stakeholder pension in addition to their occupational one. The rules are quite complicated; discuss it with your advisers.  

What choice will there be?

The number of providers is likely to be around thirty in the first instance, although this may well decline as some subsequently drop out. One prominent name will be missing - it had been assumed that Equitable Life would be among the front-runners.

Volatility

We have all heard from our investment managers at meetings over the past year or so that market volatility has increased. Sometimes it is taken as an excuse for poor short-term performance, but what relevance is it to trustees?  

Just for once the excuse holds water. It is true that the volatility of individual stocks, sectors and markets themselves has increased dramatically in the recent past.  

A striking example is the NASDAQ index which has a history of almost 30 years. The five largest daily rises ever have all occurred in the last few months. The sixth largest was a gain of just over 7% in late October 1987 as the market bounced after the October crash. The five largest ever rises were all in late 2000 and January 2001, culminating in a gain of over 10% on December 5th and an even more remarkable rise of 14% on 3rd January this year. Note: these huge rises did not occur as the technology bubble inflated, they were all after it burst.  

What are the implications for trustees? Perhaps the investment managers' excuses are valid for once. With such huge short-term swings in the markets, performance measured between arbitrarily chosen dates - typically month or quarter ends - should be considered with more than the normal degree of skepticism over shorter time periods.  

Calling the market is never easy on a day-to-day basis, recently it has been particularly difficult.

The BESTrustees Service

BESTrustees plc is one of the UK's two leading independent pension trustee companies. It combines the security of a financially sound corporate trustee, with the talents of experienced individuals, who are well-known experts in the pensions industry. Our team has a great deal of hands-on pensions experience, covering all aspects of trusteeship including investment, scheme administration, actuarial, accountancy and management issues.

We also provide statutory independent trustees as required under legislation.

and independence are key to our role and our credentials are first class in both. We believe in offering a high quality service in all we do.

Equitable Life

What can we possibly add to the debate? Equitable Life failed to find a buyer and closed to new business in December. As we go to press the situation gets ever more complex with mooted proposals to cap the liabilities and reopen take-over talks with headlines such as "Equitable Life sale: deal close" alternating with tales of doom and gloom.

Whatever the outcome, it is a sad demise for a once proud name; or as the Financial Times prefers, the end of "this arrogant institution, guilty of such staggering mismanagement of risk". For pension schemes it means the loss of the market leader in the provision of with profits additional voluntary contribution (AVC) products.

There is no right time for such an event to occur; but immediately ahead of the launch of stakeholder is clearly very bad timing. It is hard to see the public being persuaded to invest more for their retirement while securities markets are so volatile (see article on Volatility later in this bulletin) and the press is reporting a loss of confidence in insurance companies. Another year would have seen a variety of stakeholder-compliant products on the market able and willing to take the AVC strain and perhaps even a more benign market environment.

As it is, our clients along with everyone else are being forced to examine the AVC alternatives against the background of insurance companies reluctant to take on "old-style" business as they rush to get their stakeholder products to market ahead of their competitors.

Hedge Funds

Much has been written about hedge funds as a possible additional investment medium for pension schemes. But what are they, what do they do, and are British pension schemes alone in not doing it?

Hedge funds come in all shapes and sizes and have widely differing objectives, so it is not easy to generalise. Essentially, however, they are normally constituted offshore, have the ability to use significant levels of gearing and are often long/short or market neutral funds. This means that they buy one set of assets and short sell another group of assets, hoping to exploit outperformance of the assets held relative to the short positions. A simple example might be an oil fund that thought that BP would perform better than Exxon. It would buy shares in BP and borrow shares in Exxon, which it would then sell. (It pays a premium to the lender of the Exxon shares, which is where stock-lending income comes from). It would not matter whether oil shares as a class rose or fell, it would make money as long as BP performed better than Exxon.

Hedge funds operate in many investment arenas from the macro (ie any assets) funds of George Soros etc. to specialist sector, fixed income or takeover arbitrage funds.

Whilst they have in recent years, on average, produced superior returns to conventional active securities managers, their main attraction has been their lack of correlation with equity markets. Because they operate such an entirely different style of investment, their returns should be uncorrelated with conventional managers - hopefully they should not all get it wrong at the same time.

Are British pension schemes alone in not doing it?

The simple answer is no. Even in the US, where a number of high profile funds such as the giant California Public Employees' Funds (CalPERS) are well known for their allocation to hedge funds, pension plan investors represent only 8% of hedge funds, as opposed to 49% held by individuals.

For non-US investors, pension scheme holdings fall to just 3% with 30% held by individuals and 23% held by banks.  (All figures from Hedge Fund Research, Chicago).

Even if very few UK schemes are currently involved, should your scheme make a start?  That depends on the particular circumstances of the scheme and, in particular, its asset/liability profile and the trustees@ appetite for risk. As ever, consult your investment adviser.

Stakeholder

It is now only a few short months until employers need to introduce a stakeholder pension scheme, unless they are exempt. Now is the time to start preparing; although the start date is 6 April 2001, arrangements do not have to be in place until October.

"Exempt sounds good. How do I become exempt?" the cry goes up.

Only companies with less employees, those where no-one earns above the lower earning limit ((£3,484 for 2000/01), or those whose existing schemes satisfy the criteria are exempt.

What are the criteria?

There are three important ones:

• All employees aged over 18 (other than those within five years of normal retirement date) must be eligible to join.
• Waiting period for entry must be less than 12 months.
• If the employer's scheme is a GPP rather than an occupational scheme, employer contributions must be at least 3%.

The second one is proving tricky for some employers, particularly those who use short-term contract staff. If there is a 12-month waiting period for all staff, then most short-term staff are likely to be excluded. However, if the employer wishes to admit staff immediately, as most do, then that must also apply to staff on contracts of three months or more (or shorter-term contracts that are subsequently extended).

What is a stakeholder pension?

It is a new type of defined contribution scheme with minimum standards, the key ones of which are:

• Charges of no more than 1% p.a.

• Minimum contributions of no more than £20 per member

• Regular member statements

• Transfers to be accepted at no additional cost

• No lower age limit, upper age limit of 75

Are there any oddities in the rules?

Well, a couple spring to mind. There is no lower age limit for stakeholder, so you can buy one for your children (who would be credited with basic rate tax); and the upper age is limit is 75. The significance of that is that, for example, if all of a company's employees are over state pension age and in receipt of a pension, the employer is not exempt but will still be required to facilitate a stakeholder scheme for them!

The company scheme does not appear to satisfy all the criteria, what should I do?

It is a company issue, but many companies look to their trustees as a sounding board. Talk to your advisers as soon as possible.

My occupational scheme covers all my employees, Need I bother to look at stakeholder?

Yes. Stakeholder compliant products could prove to be a useful source of AVG provision. Charges may well be lower than your existing AVG facility and there are tax differences. In addition, employees earning less than £30,000 can take out a stakeholder pension in addition to their occupational one. The rules are quite complicated; discuss it with your advisers.

What choice will there be?

The number of providers is likely to be around thirty in the first instance, although this may well decline as some subsequently drop out. One prominent name will be missing - it had been assumed that Equitable Life would be among the front-runners.

Volatility

We have all heard from our investment managers at meetings over the past year or so that market volatility has increased. Sometimes it is taken as an excuse for poor short-term performance, but what relevance is it to trustees?

Just for once the excuse holds water. It is true that the volatility of individual stocks, sectors and markets themselves has increased dramatically in the recent past.

A striking example is the NASDAQ index which has a history of almost 30 years. The five largest daily rises ever have all occurred in the last few months. The sixth largest was a gain of just over 7% in late October 1987 as the market bounced after the October crash. The five largest ever rises were all in late 2000 and January 2001, culminating in a gain of over 10% on December 5th and an even more remarkable rise of 14% on 3rd January this year. Note: these huge rises did not occur as the technology bubble inflated, they were all after it burst.

What are the implications for trustees? Perhaps the investment managers' excuses are valid for once. With such huge short-term swings in the markets, performance measured between arbitrarily chosen dates - typically month or quarter ends - should be considered with more than the normal degree of skepticism over shorter time periods.

Calling the market is never easy on a day-to-day basis, recently it has been particularly difficult.

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