From Special Report: Sipp and Ssas - September 2011
In the shadows
With big marketing budgets behind SIPPs it is inevitable that they overshadow SSASs. But is there still a place in the market for the more niche scheme?
SSASs have long been seen as the niche scheme, far overshadowed by the popularity of SIPPs. While the 80s and 90s was a boom time for SSASs, with providers writing hundreds of new schemes, this has fizzled out to a handful of new schemes today.
However, all providers still argue that the schemes have something to offer above SIPPs and still need to be considered as an option. The presence of a loanback facility means that the scheme can offer a lifeline for businesses struggling in the current climate, when access to credit is still difficult, albeit not as impossible as during the height of the credit crunch.
With big marketing budgets behind SIPP schemes, it is inevitable that they will attract more attention, with many people not considering, or even being aware of, SSASs. This is unlikely to change soon, as the market to which SSAS now appeals has dwindled to a level that it is no longer worth providers putting significant marketing into them, so fewer people have knowledge of them, meaning that it becomes self perpetuating.
That said, a significant number of providers are still in the marketplace, although a tiny percentage of SIPPs, and many are still promoting SSASs. There is still choice in the marketplace, despite warnings of further consolidation, and a wealth of different schemes, charging structures and investment levels are on offer.
There are the same number of providers in the survey as last year, although some are new this year with others falling by the wayside. IPS Partnership, owned by the IFG Group, is no longer listed separately to James Hay, following IFG’s takeover of James Hay in 2010. The two offices were restructured and brought together in March of last year, with their results now being listed together. Premier Pensions is now listed under JLT Premier Pensions, as it forms part of the Jardine Lloyd Thompson group, an employee benefits company.
This year, a number of providers chose not to disclose their business figures, meaning that gauging the size of the market is more difficult. However, the total for those disclosing figures is £12.8bn, averaging £555m per provider. This is an increase on last year, when the same number of providers took part and the total was £12.2bn making an average of £558m per provider. The number of schemes has also increased, in addition to the value, at a greater rate than the value. This year’s Table shows 20,460 schemes in place, averaging 731 per provider, compared to 14,456 last year, which worked out as 578 schemes per provider.
This is either an indication of an increasing number of smaller schemes being set up or likely a sign of the reduction in the value of investments and property held within the SSAS during the past year. A large number of SSASs are set up in order to buy property, meaning that a large portion of scheme assets are invested in them, leading to their value being heavily reliant on the fluctuating property market.
The Nationwide house price index for July alone shows that, while prices rose by 0.2% in the month, they are still 0.4% lower than this time last year. The figures for quarter two painted a bleaker picture, with a 1.2% reduction year on year and only London immune from the price drops.
The figures for 2010 as a whole showed that the annual growth rate dropped to 0.7%, far below the previous figures recorded. While economists are hopeful of rises in the coming 12 months, they are cautious of the route that prices will take, meaning that it could be a very bumpy ride.
Rowanmoor has the overwhelming lead in terms of funds under management (FUM), although £457m of this is funds for which it is third party administrator. Barnett Waddingham comes a close second place, with Friends Life far behind that and the rest of the top 10 falling even further back. The spread of the market is shown when comparing the biggest provider with the tenth biggest, so Rowanmoor’s £2.9bn to IPM Trustees’ £225m funds under management.
The FUM figure also highlights the number of smaller providers in the market, with nine having FUM worth less than £100m. In particular, Hornbuckle Mitchell has just £1.1m in its SSAS book. When compared to the smallest SIPP scheme, of £17m, it is easy to see how much of a minnow the SSAS market is in comparison.
SSAS sales have been falling, with 2010 seeing a significant drop on 2009’s figures. The total of 435 schemes for 2010 is 71% of 2009’s 612 total, while the average number of new schemes per provider has reduced by almost a third.
However, the figures for 2011 to date are looking more promising, already at around 75% of 2010’s full year figures. If new business continues as it has been, full year figures for 2011 could reach 580, with the per provider number jumping to 31.
While this will not reach the levels seen in 2008 and 2009, it would be a healthy leap on last year’s data. However, bearing in mind that past performance is no guarantee of future performance, there is not any indication that growth will continue as it has been so far this year.
JLT Premier Pensions looks rockier than most, having seen a big drop in the number of new schemes written, from 173 in 2009 to just 20 in 2010. However, this is due to an acquisition in 2009, when the company took over
Save and Prosper’s SSAS book and so leading to the inflated figures. This anomaly aside, the company has seen falling new SSAS business although Patrick Evans, technical manager at JLT, says that this is something seen across the whole market. Instead of targeting new customers, the company is now focusing its attention on acquiring schemes from elsewhere, either in mass acquisitions of books of business or transferring individual schemes where investors are dissatisfied with the pricing or service of their current provider.
Evans adds, “We are always on the lookout for acquisitions. We haven’t given up on the SSAS market but most of the business goes to SIPPs now, rather than SSAS. The good days of the 80s and 90s when you wrote hundreds of new SSASs are over and now SIPPs are the preferred product.”
Part of this is down to perception, with Evans stating that SSASs are still very much seen as a company scheme while, depending on the investment strategy, SIPPs can achieve much the same as SSASs. “Nine out of ten times, probably more, SIPPs can be the appropriate vehicle,” he adds.
Rowanmoor has also seen a gradual decline in new schemes, writing 46 fewer SSASs in 2010 compared to 2009, which itself saw a marginal decline on the previous year. Other declines appear marginal, with Friends Life dropping by eight new schemes and InvestAcc writing nine fewer schemes.
When this is considered in the context of the total volume of schemes, however, the drops do not look so minimal. Friends Life’s eight schemes represent a near 30% drop in new business, as only 20 schemes were written in 2010, while InvestAcc saw a 40% drop in new business to its 13 schemes.
When seven of the 19 providers who revealed new business figures only reached single figures, it is difficult to see why some providers have not given up on the SSAS market.
However, while there have been those that have seen a decline there have also been those that saw new schemes increase, namely Barnett Waddingham. While their respective rises of 18 and 13 look paltry in comparison to the declines of the likes of Rowanmoor, it still represents a 35% and 23% rise respectively and so offers some promise.
Despite declining new business growth, as the total number of SSASs has risen considerably people are obviously not shifting out of the schemes. In part this could be due to the onerous nature of setting up and getting plans in place in the first place, but it also shows that those who opt for SSASs are satisfied with them and keep hold of them.
Looking at the total number of new SSASs in Table 1 also serves to differentiate the market, as it is not the provider with the largest FUM that has the most SSAS schemes. Friends Life has 5,180 schemes, compared to Rowanmoor’s 3,283, despite the latter having more than double the FUM. Likewise Rowanmoor then has double the number of schemes of Barnett Waddingham, despite only having £200m more in FUM.
Here we can see the differentiation between the markets that each provider targets, with Friends Life aiming for a more middle market investor, while Barnett Waddingham hones in on more high net worth individuals, having £1.6m on average per scheme.
Dentons, Ebor Trustees, Legal & General, AJ Bell, TJ Green and Accomb Trustees all appear to target or attract the high end of the market, having average SIPP values of more than £1m.
Servicing the SSAS
New business figures aside, those that want to open a SSAS need to research which providers offer the particular features that they need, at the price they want to pay. Charges show how much providers differ in their proposition, with fees for each service varying greatly.
As with SIPP schemes, it is difficult to compare like with like, as there are so many different charging structures, with some levying a flat fee for a service, while others charge a percentage or additional costs for using an alternative solicitor or for borrowing on a property purchase, for example.
For the initial fee, five providers charge nothing, presumably to attract more new business. Both Friends Life and Scottish Widows charge nothing for the initial fee, buying a property or loanbacks, instead levying an annual fee that includes all of these elements.
At the other end of the spectrum is Mattioli Woods, which charges £2,000 initially, £510 each year, plus work done on a time/cost basis. However, the first year of property buying is free. Regardless, this seems an expensive proposition. Barnett Waddingham, which has a high average SSAS value, has an average pricing scheme, so does not target this market in order to elicit more in charges. An individual wanting to set up a scheme, buy a property, organise a loanback and then pay the annual fee would be set back a minimum of £3,800.
Compare this to Hornbuckle Mitchell, which comes in at £3,450 for the same transactions and it is clear that the cost is not increased for targeting high net worth individuals.
The likes of Hanover and Ebor Trustees, which charge the annual fee on a percentage basis, would prosper with high net worth individuals, with their remuneration being directly related to the size of the SSAS scheme, while providers such as IPM Trustees and KKW Pensions, which simply state that they charge on a time/cost basis would need further investigation. This is particularly the case if no maximum or average rate was detailed.
The fees levied for loanbacks also vary greatly, with some providers stating a single upfront fee, while others break it down into a per annum charge or a fee per loan. A large number of SSAS members could benefit from the loanback facility and it is this element of the pension that many predicted would lead to a boom in new business, likely not to the extent of SIPPs but enough to propel them into a more mainstream market.
The recession came with a tightening of lending from the banks, with headlines regularly stating how difficult it was for small businesses in particular to access credit. Even those with existing credit lines were seeing it either not being renewed, greatly increased interest rates being charged or, in the worst cases, being called in early.
While Project Merlin was set up – the Government’s scheme to get more lending from banks to small businesses – its success was limited until recently. The latest data to be released show that banks are on target to meet the lending levels laid out, having paid out £37.4m against the £38m target.
However, it was a different story earlier this year, when banks missed the interim target and the Federation of Small Businesses, which champions the case for small and medium enterprises, says that the underlying issue has not been addressed.
John Walker, national chairman of the organisation, says that a recent survey of its members shows that, of the 20% of small firms that requested credit in the past 12 months, a third have been refused. This shows that SSAS providers still have an opportunity to target themselves at this market and grow considerably.
The changes made by the FSA in 2010 hampered the success of SSAS considerably. The move meant that the security for a loanback had to have a first charge on it, meaning that no other first charge lending could be secured against it. As property is the main security used for loanbacks this became unfeasible for many, as the majority already had a mortgage on it.
This was a significant blow for SSAS schemes, at a time when it could have received widespread coverage for being the solution to the business lending issue.
There are other routes around the issue, namely using other property, such as machinery, tools or other business valuables to secure the loan. Intellectual property can also be used as security, meaning that the website or trademarked logo or name of the company can be used.
Regardless the obstacles in the way, loanbacks still represent a very attractive feature of the pension, as they can be utilised by the business for its specific needs. SSAS members are free to charge whatever interest rate they wish, to a minimum of 1%. This flexibility can work in one of two ways.
The SSAS can charge a very low rate of interest, lower than the banks, and the business will benefit from a greatly reduced cost of borrowing. On the other hand, members can charge a high rate, which benefits the pension scheme. If the latter option is taken the company does not lose out, as interest payments will be charged as a business expense and so reduce the amount of profit liable for corporation tax, making it a very tax efficient move.
Here it can be seen how important it is for the financial adviser and provider to be well informed and aware of the best way to utilise the scheme’s features. Looking at the services offered in Table 2, 10 of the 33 providers do not act as scheme administrator for the SSAS.
Of those that do act as scheme administrator a number insist on it. Many providers are vocal about the need for a professional scheme administrator to be in place, rather than this role being appointed to the scheme members.
It is thought that a significant proportion of SSAS members who are scheme admini-strators are either unaware that they hold this role or are unsure what responsibilities it carries. Among other things, the scheme administrator has to retain documents relating to investments and assets, payments made, purchases of annuities and the administration of the scheme, keeping this information for six years.
The role also includes registering the scheme with HMRC, distributing information to members and representatives, completing reports for HMRC and providing accounts on the scheme. The penalties for not adhering to the rules of scheme administration can be potentially disastrous.
The scheme administrator also has to ensure that any investments made are compliant with the HMRC and are reported to them correctly. This is an area that even pension providers, which have been in the industry for years, debate over, with some permitting investments where others will not. If an investment is deemed to be unauthorised, the administrator could be in line for some hefty tax payments and unauthorised charges.
As with the SIPPs market, the SSAS market has split between providers and plans that allow an investment permissible by HMRC and those that restrict the investments. However, unlike SIPP providers there are fewer SSAS providers that limit the investments but, as of the 33 providers in the survey, 10 restrict, this still represents a significant number.
Of these 10, the restrictions vary, with some stating restrictions that are inherent to SSASs, such as Accomb Trustees and Simmonds Ford only taking a first charge on property in loanbacks. Unlisted or overseas shares are restricted by many of these 10, including Accomb Trustees, Dentons, JLT, Linley Trustees, Simmonds Ford and AJ Bell, while Ebor and AJ Bell will not allow any investment in taxable property.
Pushing the product
The new business figures highlight that SSAS is not headed for the mass market any time soon. While year to date new business for 2011 looks promising, the small number of providers in the market and their reluctance to place marketing budgets behind the schemes means that they are likely to dwindle in the background for a while. This is particularly the case as SIPPs enjoy ever increasing popularity.
A number of providers speak about SSAS as though it is a person in its own right, deciding its own destiny, rather than a product that they can market, advertise and on which they can educate advisers. They talk about SSAS dwindling in the background and being overshadowed by SIPPs, which have developed significantly, despite the fact that it is providers themselves behind this development and prominence.
A cynic may say that the increased revenue that a provider achieves from a number of SIPPs clubbing together to buy a property, versus the members gathering together in a SSAS, is a reason behind this. Regardless, it will only hit the big time if providers want it to. And the state of the market at the moment suggests that they do not.