SSAS survey: Changing tides

Small self-administered schemes (SSASs) are a whole different beast. While they are still a pension product, they have certain features that make them appealing to company directors in the here and now. SSASs, for example, can be used to purchase commercial property, which makes them an attractive option for business owners who are failing to find funding from banks. They can also be used to offer loans to the sponsor company, as detailed on page 69.

But there is strong debate over the future of SSASs and their place in today’s market. Some see them as an incredibly useful tool for small firms, particularly in difficult economic conditions. Others view them as old-fashioned and on their way out. Either way, the market is alive and kicking, with hundreds of SSASs set up each year. Funds under management now total more than £15bn.

The market is not without its challenges, however. Since the removal of the pensioneer trustee role in 2006, numerous SSASs are without a professional administrator. This is leading to trustees tripping up and incurring penalties that could have been avoided with proper supervision. And the constant tinkering of pensions legislation is causing both providers and trustees regular headaches.

With so many challenges, is the market showing growth, stagnation or a steady decline?

Game of numbers

This year has seen a significant increase in the number of providers participating in the survey, with 43 – compared with last year’s 29 – supplying information. This is in part due to help from the Association of Member-directed Pension Schemes, the trade body for SSAS providers, which published our survey to all its members and encouraged participation. The SSAS market is well known for its numerous small providers, and this helped reach a number of firms that might otherwise have fallen beneath the radar.

Although many of the companies that have taken part have very small books compared with the larger providers, the survey shows the vast spread of SSASs available across the country and the different service models they offer.

But some notable names declined to participate this year. Legal & General, which usually responds to our survey and last year had £392.1m assets under management, chose not to take part. It said that it is remaining in the SSAS market, but was not in a position to release information at present.

Another large provider missing from the list is Standard Life, this time with a definitive reason. It plans to stop writing new business at the end of 2013, saying advisers no longer recommend its SSASs. “Although there is still a market for SSASs, this is a specialist market and not a core market for Standard Life and the adviser firms we work with,” says Alistair Hardie, head of pensions accumulation at Standard Life. “We find our advisers now recommend our Sipp or wrap offerings instead.” The firm says it has no plans to sell its existing book of business that totalled £489.2m in last year’s survey.

Table 1 shows the assets under management for the majority of survey respondents. Several do not feature here as they declined to provide any details about their assets; specifically AJ Bell – whose omission was down to a “management decision”, although last year reported £677m under management – DA Phillips & Co and Nigel Sloam & Co.

The absence of large providers alongside the inclusion of new participants means comparing totals with last year is difficult. This year’s total funds under management of £16bn shows an increase of 9.8 per cent on last year’s £14.6bn. But the average funds under management per provider has dropped from £685m to £485m. However, these figures exclude Standard Life and L&G and include 14 more providers than last year, so cannot be compared like-for-like.

Another way to gauge the fluctuation of SSAS figures is to look at providers that submitted data for funds under management this year and last. Of the 17 providers this applies to, there was a 5.8 per cent increase. Whichever way it is looked at, SSASs appear to be on the up.

The largest growth in business comes from Rowanmoor, notching up an extra £414.7m in business than reported last year. The firm also takes the title of largest firm by funds under management, holding £2.7bn.

Xafinity, a smaller but still sizeable player in the market, had the next biggest growth compared with last year, adding £290.6m of SSAS business to its books – a hefty proportion of its £881.1m funds under management. This was largely due to Xafinity’s acquisition of Alliance Trust’s SSAS book, which added more than 340 clients onto its books.

According to Jeff Steedman, Sipp and SSAS business development manager at Xafinity, this is a trend the firm will continue. “We will be trying to buy as many SSAS and Sipp competitors and providers as we possibly can,” he says.

While not wishing to name any takeovers in the pipeline, Mr Steedman singled out life companies as firms likely to be exiting the SSAS market in coming years. “In my view, it is not really an insurance company-type product anymore,” he says. “It is not core to their business. I can’t think of any life companies actively marketing it.” With Standard Life exiting the market and other life offices reporting negligible growth or even decline, it seems his predictions may well be correct.

One life company still commanding a rather large market share is Friends Life. With £1.3bn in its 4,407 SSASs, it continues to hold a significant proportion of all schemes. But financially, it saw one of the largest losses of business at £51m.

For Friends Life, SSASs are no longer a primary stream of new business, having written only nine new schemes in 2012. Addressing its reduction in business, it said, “For an old book of business, we do not deem an annual reduction in schemes of less than 7 per cent, with a reduction in asset values of less than 4 per cent, to be an excessively high rate of attrition.” It said that the majority of scheme terminations are due to customers choosing to transfer their benefits to a replacement product, “sometimes as part of their retirement strategy”.

Price and proposition

When selecting a SSAS provider, getting to grips with what is offered and how much it costs is imperative. Table 2 gives a detailed breakdown of what is available, along with charges from each provider. All providers that responded are featured in this table, including those that did not appear in Table 1 because they had not reported any business-level data.

The industry is broad and there are many different business models. Some providers charge initially and for each subsequent service required, while others have one all-in management fee that includes property transactions.

Several providers adopt a model in which they make no upfront charge – this is followed by Friends Life, IPM Trustees, Scottish Widows and Xafinity. All charge nothing at the outset but differ significantly in their approach to annual fees: Friends Life is on a time-cost basis; IPM Trustees charges a flat fee of £500 plus £170 per member and more if necessary on a time-cost basis; Scottish Widows charges a flat £940 per year; and Xafinity charges £650 for the first two members and £255 per member thereafter.

At the other end of the scale, some providers have a rather hefty set-up fee. The most expensive is the £2,500 charged by Wensley Mackay, although it points out that this cost includes property purchases and loanbacks within the first year. Depending on the intended uses of the SSAS, this could prove more economical than on first appearances. Mattioli Woods charges on a time-cost basis with a maximum of £2,500, which seems high but is at least capped. Several providers – namely Channack Consultancy, Lane Clark & Peacock and Michael J Field – all charge an initial fee on a time-cost or client-specific basis, giving no insight into how they compare to their peers.

One of the priciest options overall is from Nigel Sloam & Co. It charges £2,400 at the outset, plus £1,410 per year, and has one of the highest fees for loanbacks at £950 plus £150 per year. Partner Guy Young says this is due to it being an all-in cost, with consultancy and scheme administration included – services that may incur additional costs under other structures. He says this is the preferred model of the high-net-worth clients the firm caters for.

Of course, fees are not everything; service is key in the SSAS world, as is whether or not the provider is acting as a professional administrator. This can make a big difference to how the SSAS operates and ensuring it stays within the letter of the law.

The reason fees are often so high is due to their paper-based system, according to Xafinity’s Mr Steedman. “Traditional SSAS practice [relies on an] old-fashioned chequebook and pen,” he says. “It is a little bit more difficult to get SSAS trustees to give that up. They are definitely, by their nature, much more clunky. That is why SSAS fees are generally higher than Sipp fees.”

SSASs have struggled to keep up with other pension products in a platform world, mostly because they are so often used for bespoke commercial property purchases and loanbacks. These do not lend themselves to platform processing, adding on manual time and costs. And, of course, each SSAS must be registered as a separate pension scheme, inevitably adding more paperwork.

According to an estimation by Rowanmoor, a three-member SSAS can be more cost-effective than three bespoke Sipps. As the table shows, fees are typically levied on a flat rate rather than as a percentage of assets under management, and assets are often used for property purchases or loanbacks rather than collectives. Because of this, the more members in the SSAS, the more cost-effective the scheme becomes.

Beauty parade

With both being bespoke pension arrangements, it is hard not to compare SSASs with Sipps. Since the realisation that SSASs would not die out after A-day, commentary has bounced back and forth over whether year ‘X’ would finally be the one when SSASs overtake Sipps.

But a SSAS is a far more niche product, fitting a very particular set of circumstances. This is reflected in the funds under management; the latest Money Management Sipp survey in October 2012 showed £88.57bn held, compared with the £15.75bn held in SSASs.

It is far easier to set up a Sipp; an individual simply needs to approach a provider to get started. A SSAS is far more complex. Practically anyone can set one up, but its trustee structure means significantly more legal paperwork and there is more onus on scheme members to get it right themselves.

The hefty clampdown on Sipps seen in 2012 has led some to believe more people will be interested in SSASs. With The Pensions Regulator taking a much more backseat role regarding SSASs than the FSA does with Sipps, the former has the potential to attract attention in the future.

SSASs have escaped detailed scrutiny for a number of reasons. Regulators are primarily concerned with protecting retail consumers and preventing them from accessing potentially detrimental products. However, SSASs are targeted at directors of limited companies who are likely to be viewed as more financially sophisticated than retail investors.

It could also be argued that the level of financial damage that could be inflicted by SSAS members is limited. With full flexibility requiring a maximum of 11 members, a relatively small number of people would feel the impact if an individual scheme went wrong or was operated incorrectly.

Another reason many believe SSASs have slipped beneath the regulatory radar is that there have been no widespread issues demanding attention. This is in part due to the fragmented nature of the industry. With so many small providers and each scheme a separately registered entity, any issues tend to be isolated.

Anecdotally, most problems with SSASs occur because of a lack of understanding by the trustees or the decision not to appoint a professional administrator rather than deliberate abuse. But there is always a risk with an expanding and lightly regulated product.

There is a possibility that less scrupulous Sipp providers may struggle to stay in the market due to increased capital-adequacy requirements, deciding instead to offer SSASs despite a lack of expertise. They may see SSASs as an opportunity to access quirkier investments, but Tim Sargisson, managing director of James Hay, says this is not the right approach. “It is not about an opportunity to invest in racy, esoteric investments that you can have in a SSAS structure rather than a Sipp,” he says. “We still have to undertake due diligence whether it is one or the other.”

Concerns from within

Those on the frontline have the greatest insight into concerns within the industry and the SSAS market is no exception. In this year’s survey, providers were asked to comment on the issues that most troubled them in the current environment. The results are shown in Chart 1.

The area of most concern was regulation, covering a wide range of issues. A significant number of providers – 29 per cent – said they were worried about the almost constant changes to pensions legislation and HMRC rules, highlighting the difficulties of making long-term retirement saving plans when the playing field keeps changing.

Causing almost as much concern is the prevalence of SSAS orphans at 21 per cent. Numerous providers pointed out that trustees of SSASs without a professional administrator – a role effectively removed in 2006 – were contacting them for assistance in getting their SSAS back on track, often following an error. Multiple providers called for the reinstatement of a legal requirement for a pensioneer trustee.

“When you consider the complexity of pensions – even for professionals – there is a big dose of trust that you are reporting correctly,” says Robert Graves, head of pensions technical services at Rowanmoor. “If you don’t even understand what you are reporting, you may inadvertently slip up. This is why a lot of the industry would like to see the return of the pensioneer trustee – it would certainly help prevent any deliberate abuse.”

Lack of advice was highlighted by 10 per cent of providers. They pointed out that, with the particular complexities of SSASs, those setting one up would benefit greatly from solid financial advice in all aspects of the process. Due diligence was also raised by 7 per cent of respondents, specifically around ensuring a suitable security for loanbacks.

Burgeoning appeal

Even putting these issues aside, SSASs face significant struggles on the promotional side. While there are some big players in the market, there are many smaller firms that rely on word of mouth to gain business rather than actively selling their wares.

There are – or were – undoubtedly issues among intermediaries, too. The commission structure of pensions seen in the pre-RDR world did not sit well with SSASs since it was typically based on funds under management. While this is fine if most investments are made into collectives or shares, a good chunk of many SSAS funds are used for purchasing commercial property of the trustees’ business or loanbacks. It is difficult to make a commission remuneration structure work with such investments.

In the post-RDR world, commission is off the table and fees must be agreed upfront. This suits SSASs far better. “We are beginning to see a turnaround where advisers and accountants are recognising that the SSAS is still a valid tool for small businesses,” says Rowanmoor’s Mr Graves. “We are hoping the RDR will bring IFAs back into the fold for that.”

In terms of setting up new SSASs, company directors are already accustomed to writing out cheques for services, so paying upfront for advice on creating a SSAS will not come as a surprise. And with so many options in the market, that advice can really add value.