SSAS regulation: Is anybody watching?

While its actions are not without justification, hefty regulation does not always present added value to the investor – indeed, the reverse can be the case. The scale of the FSA’s intervention in Sipps has led advisers to look again at small self-administered schemes (SSASs), which face far less regulatory scrutiny.

Although a more niche product, the schemes can offer similar flexibility to Sipps. Trustees are responsible for managing SSASs and, while they are not regulated by the FSA, there is some regulatory oversight and schemes can be effective if run properly.

Taking a back seat

A SSAS is set up under a trust by the employer for the benefit of invited employees. As such, it is an occupational pension scheme, meaning the regulatory oversight falls on The Pensions Regulator (TPR).

TPR’s key concern is protecting members of large company schemes who are reliant on the prudent actions of the appointed trustee boards and the funding of the sponsoring employer; internal disputes within a SSAS are instead dealt with by the Pensions Ombudsman. The light-touch regulatory regime reflects the fact that SSAS members should form all, or part, of the scheme’s trustee board.

A recent example from November 2012 saw the ombudsman intervene in a dispute between two brothers. The issue centred on a failure to keep a scheme’s rules updated, which impacted on benefit provision and managing the scheme’s investments.

But TPR is not without teeth. In 2009, its determinations panel stopped a SSAS trustee company and its directors from acting as a pension trustee. The case was rare – presumably triggered by the impact on multiple schemes and so a large group of members – but it is a reminder that, on occasion, action is taken. The regulator also has the power to take measures against member trustees if necessary.

Being individually registered schemes, SSASs do not collapse if the provider fails; they remain intact and can continue with one fewer trustee, in much the same way as if a member trustee died. A new professional trustee can be easily added to the scheme by the sponsoring employer or the remaining trustees.

Keeping within the lines

The need for an independent professional trustee was removed in April 2006 to avoid contravening European law, allowing SSAS members to manage their own finances. While the idea may be attractive to members, SSAS rules are complex and the tax penalties for getting them wrong are severe.

The number of schemes without a pensioneer trustee is a concern across the industry. One option is a soft return to the previous regime to protect both scheme members and HMRC, whereby a SSAS must have at least one HMRC-registered trustee who is responsible for the safekeeping of funds. This trustee could, however, be one of the member trustees.

While many tax misdemeanours in SSASs are through lack of understanding, there is a worry that SSASs could deliberately be used in place of Sipps to funnel pension funds into speculative investments.

There is an in-built higher barrier to entry for setting up a SSAS – the employer must create it. But it is easy to set up a company online for less than £50 and use it to start a SSAS, even if it is a non-trading company. It is unlikely such people would appoint a professional trustee, so the risk is real. Consumers must be educated about the risks of investing in speculative funds and the authorities must take early action against any fraudulent investment providers or promoters.

As long as no major issues come to the fore, hands-off regulation will continue to work for SSASs. The one area that would make a big impact would be the re-establishment of a required pensioneer trustee to ensure the correct running of SSASs.

Andrew Roberts is a partner at Barnett Waddingham