FTAdviser.com

Advertising

The more traditional asset-allocation model, employed by the majority of investment houses, has been focused on a staid balance of equities and bonds. This has seen too many managers remain fully invested, unable to switch and left to watch from the sidelines as their funds plummet in value.

Given the severe drop in the value of these funds – by anything up to 55 per cent over the past year – those nearing retirement are asking whether they can afford to leave employment now, and those fortunate and young enough to do something about it are asking what they should do.

More importantly, how can companies offering such schemes retain staff and entice new candidates?

The answer is to offer a corporate Sipp, although it is key to avoid replicating the old-style investment philosophy.

The investments offered within a corporate Sipp must provide true diversification across a range of asset classes, as uncorrelated as possible, to reduce risk and provide greater certainty. An alternative investment approach should therefore be encouraged. Selecting a manager who is able to move investments into cash – should it be required, as has been the case recently – would further reduce risk and avoid a repeat of the current situation.

What does a corporate Sipp offer that the more traditional group personal pension or the plethora of schemes in existence do not?

As well as the ability to access a range of funds within a corporate Sipp, individuals can manage their own pension funds, either by themselves or through a discretionary investment manager.

Crucial to this consideration is that the discretionary investment manager takes a more active role in running the pension fund and is more accountable to both members and trustees.

This will benefit individuals and companies alike, as discretionary investment managers can offer a more flexible approach to running a portfolio. This is a superior approach to multi-manager portfolios or standard default funds being selected by an adviser.

Following changes to the pension rules in April 2006, companies have the power to review their pension arrangements and to alter their investments.

However, few companies have thus far exercised these powers, probably in light of the drop in value of some investments. But this being the case, why would a corporate Sipp be any different?

Sipps enable a wider range of asset classes to be employed, and it is this advantage, their ability to offer greater diversification, that sets them apart from older arrangements – provided this additional flexibility is utilised. Companies are realising the benefits and starting to address the situation.

To whom should investors turn to address the options available?

Although the new rules allow for a wider investment choice, this seems to be creating confusion for those looking to identify a solution.

The answer is to seek advice and guidance from those who have been managing investments within the wider asset classes now eligible for inclusion in Sipps.

An increasing number of market participants are starting to recognise the benefits of investing in alternative asset classes and are adjusting their approach accordingly, so it is important to identify those firms that have a proven track record in this space.

When reviewing potential investment managers, advisers should have a clear idea of their clients’ risk/reward requirements. Reviewing past investment performance is important, as is reviewing costs, but style, limitations and objectives must also be considered.

For example, you wouldn’t just invest in one asset class that held one investment. A strategy that invests across a number of asset classes will reduce the risk through greater diversification.

There is always going to be a trade-off of risk versus return but, given the experience of the past 18 months, most companies are looking for a low-risk, conservative approach for their investments to preserve capital.

The key to success within a corporate Sipp is to hold a range of uncorrelated investments, so if one investment is not performing at any given time, others will be.

This is where alternative investments come into their own and where a large number of investors and investment managers have neglected to hold a range of assets that is sufficiently diversified and uncorrelated.

Furthermore, the underperforming investment or asset holdings should be liquid enough to enable a timely transition to cash, thereby eliminating the potential for significant loss in a falling market.

More companies are turning their attention to corporate Sipps as they become aware of their advantages, with significant numbers planning to make this their principal pension arrangement.

Currently, a small percentage of companies operate a corporate Sipp, but this can be expected to balloon over the next 18-24 months, driven by the poor performance of traditional pension schemes and the limited investment options they provide.

Similarly, with compulsory enrolment into the state’s pension offering coming into effect in 2012, a growing number of employees are turning to their employers to provide access to affordable savings vehicles.

Corporate Sipps allow the option of a tiered investment offering, enabling top executives and directors to benefit from the addition of discretionary investment management.

This enables each individual’s situation to be reviewed and the appropriate strategy – or funds – to be selected for his or her needs.

It is this greater flexibility, with the wider fund choice, combined with the ability to offer a tailored solution to ­different groups within a company, that is diverting attention to corporate Sipps.

Companies should be offering corporate Sipps, although the one-size-fits-all model should be avoided. Sipps provide the ability to invest in, for example, employer shares and receive in-specie company share plans, incentive plans and other pension arrangements within the Sipp vehicle.

For smaller companies, a corporate Sipp can be used to enable a group of executives to club their pension funds together for a mutually beneficial purpose, such as buying their own offices.

The flexibility of Sipps allows different options to be considered and a tiered approach will suit a larger company’s structure, so it is important to get the balance right.

Default funds can pro­­vide the main offering through an en­hanced range of investments, including a discretionary offering, for the directors.

It is time to take a look at the environment we find ourselves in, review existing arrangements and help companies make the necessary choices for their business model and employees.

Bruce Ely-Johnston is head of adviser solutions at London & Capital