A decision tree in need of root-and-branch reform

Stakeholder pensions, the low-cost scheme which is being promoted by the Government, is about to come one step closer with the imminent publication of "decision tree" forms to help you decide whether to take out one of the new pensions.

Stakeholder pensions, the low-cost scheme which is being promoted by the Government, is about to come one step closer with the imminent publication of "decision tree" forms to help you decide whether to take out one of the new pensions.

The decision trees, which are due to be published in the next couple of weeks, will take you through your financial circumstances. A series of questions leading through a number of trees, result in one of three main conclusions: to stick with the pension you are in; to consider taking out a stakeholder pension or to seek independent financial advice (IFA).

However, before the decision trees have been allowed to take root, they have already drawn severe criticism from the pensions industry that is gearing up to offer stakeholder products from next April.

The problem, some companies say, is that the decision trees will be overly complicated, and will put off the very people they are designed to assist.

Lorraine Brannan, head of product marketing for Marks & Spencer Financial Services, which will offer the new pensions, said: "We have concerns about how the decision trees are going to be set up. It is ironic because a product that was supposed to be simple could become very complicated."

The Government first intended stakeholders to be aimed at people on salaries of between £10,000 and £20,000 who were not offered a pension by their employer. While nearly all employers will be forced to offer a pension from next October, there is no obligation on consumers to buy one. Providers are anxious that low-income groups will not take out a stakeholder pension if the process is made time-consuming and complicated.

However, the forms, which industry insiders expect to run to a total of 15 pages, could put off the more affluent groups of people who may be considering taking out a stakeholder pension to enhance their retirement savings. Anyone currently in a company pension and earning under £30,000 will be able to hold a stakeholder pension. If you do not belong to a company scheme, there is no upper limit on what your earnings can be.

Ms Brannan said: "We believe that providers will have to send out a decision tree and will not be allowed to talk people through questions over the phone. This is ironic because it will be more difficult to buy a stakeholder than one of our personal pensions, which are seen as more complex products."

This stipulation could be particularly cumbersome as the pensions industry is planning to sell lots of its stakeholder products through direct channels - over the phone or via the internet. This is because the charges on the product have been capped at one per cent per annum and so providers want to keep costs down.

Providers are concerned that in too many cases a journey through the decision tree will lead to a box which says "seek advice". This could put off a significant number of customers who are not used to dealing with an independent financial adviser and who do not want to pay an additional charge for the advise.

Some large pension companies are finding their way around this problem. Legal & General, which will run large-scale stakeholder schemes for companies and for groups like trade unions, is planning to offer advice within the one-per-cent charge.

The Financial Services Authority (FSA), the financial regulator which is finalising the decision trees after consulting pension providers, stresses that the process will not be too complicated.

However, many industry figures privately acknowledge that it would be very unwise for the Government to push a product that does not come with a fair amount of guidance, in order to avoid possible future accusations of mis-selling.

The FSA also points out that it is important for consumers to understand what considerations should be taken into account when thinking about a stakeholder pension. One such issue will be that even if a stakeholder makes sense, do you obtain it at work, from your trade union or privately from a direct provider? The decision trees clearly could not go into this much depth and so the only realistic option is to advise people to consult an IFA.

In turn, consulting an IFA will not necessarily alert you to all available products. Companies like M&S, which sells its pensions directly, are unlikely to be on IFA lists as they do not pay commission to third parties.