August 7, 2000
Merrill Lynch Investment Managers, the London branch of Merrill Lynch Asset Management of New York, is one of the first mutual fund companies in the U.K. to announce plans to offer stakeholder pensions as part of a new, mandatory defined contribution system that the British government is introducing next year.
Designed much like U.S. 401(k) plans, stakeholder pensions are scheduled to be available in April 2001, said Lee Jagger, a partner with Bacon & Woodrow, an actuarial and consulting company in London. By October 2001, companies with five employees or more that do not already offer a defined contribution or defined benefit plan will be required to offer a stakeholder pension, he said.
The British Parliament passed the Welfare Reform and Pensions Act, paving the way for stakeholder pensions, in November 1999, according to the U.K. Department of Social Security. The pensions are designed for people with moderate incomes of $15,000 to $30,000 who are not generally covered by defined contribution or defined benefit plans, according to the Social Security department. The department's goal is to ensure that a greater proportion of the population is saving for retirement.
In Britain, as in the U.S., people 65 or older receive the equivalent of social security, but as in the U.S., this amount is generally as little as $750 to $1,000 per month, according to the department.
Merrill Lynch is offering stakeholder pensions because it "sees it as the new model for the DC [defined contribution] market" in the U.K., said Sarah Aitken, head of the U.K. defined contribution team at Merrill Lynch.
"It's a government-sponsored initiative, so it's very visible," said Aitken. "Plus, 45 percent of our plan sponsor and pension clients said they were interested in stakeholders."
Merrill Lynch has yet to decide how many stakeholder pension funds it will offer or what asset classes they will include, but they will probably be created through new share classes on a few of the 28 funds that Merrill offers in the U.K., Aitken said.
Merrill Lynch's favorable view of stakeholder pensions is not shared by most British fund companies, said Jagger. This is shortsighted on other firms' parts, he said.
Merrill's view of the potential for stakeholder pensions is on target, he said.
"It has pretty massive potential," Jagger said.
U.K. mutual fund companies until now have been reluctant to offer stakeholder pension funds because they were invented for low- to middle-income people at small companies, Jagger said. But, Jagger said he expects the market will be lucrative and will not be limited to the assets of low and middle income people.
The law restricts stakeholder pension fees to no more than one percent. Most U.K. fund companies view that as prohibitively low and likely to result in low-grade products, Jagger said.
The one percent cap was a concern to Merrill Lynch, Aitken said. This prompted the firm to search for a low-cost shareholder service company before deciding whether to offer stakeholder pensions, Aitken said.
In the end, Merrill chose AMP of Sydney, Australia to design the software to offer the plans over the Internet. AMP has already successfully used comparable software for a similar government-sponsored 401(k)-type program in Australia, Aitken said. It was AMP that made offering a stakeholder pension plan economically feasible for Merrill, Aitken said.
Merrill was particularly interested in this new type of defined contribution savings plan because the firm foresees U.K. companies continuing to switch from defined benefit plans to defined contribution plans, Aitken said.
Jagger said he expects a major switch from defined benefit to defined contribution plans to occur in the U.K. within the next 10 years, much as there has been in the U.S. in the last 20 years.
Currently, U.K. fund companies view the U.K.'s $100 billion defined contribution business as inconsequential compared to its $1 trillion defined benefit business, Jagger said. However, those companies are mistaken about the potential impact of stakeholder pensions, he said.
Mid- to large-sized companies that already offer defined contribution plans, known as personal pensions in the U.K., will also either add stakeholder pensions to their retirement savings programs or convert their plans entirely to stakeholder pensions, Jagger said.
A growing number of plan sponsors view stakeholder pensions as the next wave of defined contribution plans, Jagger said. Stakeholder pensions are likely to be web-based because of the cost constraints of the one percent fee cap, he said. And as an Internet-based product, they will be viewed as more up-to-date than personal pension schemes, he said.
The fee cap is also likely to result in fewer investment choices in stakeholder pension plans, Jagger said. Unlike in the U.S., where 401(k) plans have become increasingly complex with myriad offerings, British plan sponsors view limited choice favorable since it is easier for participants to understand, Jagger said.
The positive publicity that stakeholder pensions are likely to command this fall might also convince some U.K. employers with defined benefit plans to gradually convert them to defined contribution plans, Jagger said.
The British government expects at least five million people to participate in stakeholder pensions, Jagger said. The government will promote stakeholder pensions with a $7.5 million marketing campaign in the fall, he said. Any fund company that introduces a stakeholder pension product soon after the campaign will benefit, Jagger said.
Fidelity Investments of Boston and Schroder Capital Management of New York are both considering offering stakeholder pensions in the U.K. as well, said spokespersons for the two firms.