Busting the ‘unregulated’ myth

This is a slightly unfair comparison as The Pensions Regulator (TPR) fills the role of the FCA when it comes to occupational schemes including SSASs. Also, HM Revenue & Customs monitors SSASs more closely than other schemes and issues annual scheme returns to scheme administrators to help monitor scheme activity.

It was in part the surge in popularity of Sipps with the resultant expectation that they would no longer be niche pension products that led to regulation of the Sipp industry. There are reportedly more than one million Sipp members across around 100 products.

In contrast, SSASs did not experience a similar growth spurt. Although SSASs are becoming increasingly more attractive than Sipps – driven in part by investment choices for the latter becoming more restrictive in practice – it is generally thought that the SSAS market remains fairly steady at around 35,000 schemes representing up to an estimated 100,000 members.

So how do the authorities regulate SSASs, and how could they improve what they are doing?

The taxman

HMRC is primarily interested in making sure that scheme administrators apply pension rules correctly and that any tax is properly reported and paid. Key reporting requirements are the annual scheme return, the event report and the accounting for tax return. These supplement the returns needed to recover tax deducted from investment income or claim tax relief on member contributions.

The annual scheme return is the principal source of information gathering by HMRC. It is only required if demanded by HMRC but in practice almost all scheme administrators will receive a

notice to file the return by

31 January following the completed tax year. This scheme return contains summary information of the scheme investments and key transactions such as contributions and transfers in, lump sum payments and transfers out.

The event report also has to be submitted by 31 January but only where there has been a certain trigger event, such as payment of high value retirement benefits, transfers to overseas pension plans and unauthorised payments.

The accounting for tax return is a quarterly return to enable schemes to pay tax such as the lifetime allowance charge and charges on lump sum payments on death.

The issue with the annual scheme return and the event report is the lag between transactions occurring and becoming reportable. For example, a scheme set up in May 2013 would not need to submit an annual scheme return or event report to HMRC until January 2015.

HMRC also issues new scheme tax references and recently has started to intervene in the previously automatic registration process.

Chart 1 shows the number of new registered pension schemes each year since the 2007/08 tax year. Since October 2013, HMRC has been reviewing submissions before issuing the tax reference needed to make tax-relievable contributions and receive transfers in. This was in reaction to concerns some new schemes were being used to liberate pension funds.

In terms of improving its oversight function, HMRC could consider putting newer schemes under closer scrutiny. It could achieve this under its general powers to be able to request information by asking schemes for details of their transactions every three months for the first two years of existence. This eliminates the lag issue and while it would lead to increased costs for consumers, it would only be temporary.

The two regulators

The FCA is promoting better “systems and controls” for personal pensions such as Sipps, while TPR is doing its bit in promoting better governance by scheme trustees of occupational schemes.

In its paper entitled “Strategy for regulating defined contribution pension schemes” issued in October 2013, TPR noted that despite the different ways of describing their regulatory strategies and those of the FCA, the activities that underline them are broadly analogous.

In November that year, TPR issued Code of Practice 13 setting out its governance standards for trust-based defined contribution occupational pension schemes. This covers such issues as trustee knowledge and understanding, member administration, investment options, risk controls and general governance. Although presumably directed largely at staff schemes with less than 100 members, there is no exemption from these standards for SSASs. This could be an indication that TPR is expecting all member trustees to know how to exercise their duties and have responsibility for ensuring their scheme is properly managed.

TPR maintains a list of occupational pension schemes but single member schemes are not required to register. Table 1 shows the range of defined contribution occupational pension schemes as of January 2013.

If these schemes are not flagged with HMRC as being member-directed, they could fall below the radar of both HMRC and TPR. An obvious means of addressing this is to require all occupational schemes to register with TPR. This will add slightly more cost to consumers as there is a small levy to pay and an additional online report but once registered TPR can apply its “educate, enable and enforce” system.

On the other hand, an integrated approach between HMRC and TPR could bring about efficiencies and offset any increase in costs. After all, surely it is the common goal for both HMRC and TPR that trustees understand their responsibilities and run their schemes in accordance with the rules? The multiple of returns needed to be submitted to HMRC could be combined with the online reporting to TPR. This could improve efficiencies and allow TPR to identify problem cases more quickly.

Pseudo-occupational schemes

A court case last year confirmed that trust-based schemes set up by companies – whatever the scheme’s structure or company history – are occupational pension schemes and so fall under the jurisdiction of TPR rather than the FCA.

To the lay person, it may seem odd that a sort of pseudo-occupational scheme falls under the jurisdiction of TPR rather than the FCA. Occupational schemes are not tied to one pension provider, whereas Sipps are. Therefore, in theory, a failure by a firm providing professional administration services to an occupational scheme, whatever its size, should not expose scheme assets to the same risk degree as if a Sipp provider fails. This helps explain why a Sipp operator must keep a certain level of capital available if it wants to operate a Sipp, whereas SSAS operators do not.

An emerging issue is that there are small schemes where the members are reliant on a third party to keep scheme records, and so there is a risk if that third party disappears. While the FCA may be more of a deterrent to a firm setting up as a SSAS specialist, as occupational schemes are out of their domain the more appropriate reaction is to consider whether TPR could be doing more in educating, monitoring and engaging with trustees and members.

Capital buffers

Another consequence of regulation by the FCA is the need for Sipp providers to hold capital as a buffer against the firm running into difficulty. This should provide consumers with added protection as it would allow the provider to carry on in business while passing on the business to another firm.

The Sipp industry is keenly awaiting the new rules for determining how much capital a Sipp provider must hold to be allowed to continue in business. These rules are expected in the summer and the period of uncertainty is causing some investors to use SSAS as a more flexible pension vehicle. Should similar capital adequacy rules be applied to SSAS providers?

This question is similar to asking whether accountants should have to hold money in reserves if they complete tax returns. If the accountancy firm closes, you can simply transfer your business elsewhere and pass on the paperwork. Of course, you will need to keep records yourself so you are not reliant on the accountant.

Regulation discussions

There is the inescapable issue that it is much easier to set up a firm to provide SSAS services regardless of your level of expertise. Ultimately, any distrust in such pension firms may end up being a focal point for those questioning whether more supervision is needed of firms acting as independent trustees and pension administrators to occupational schemes.

Even so, any talk of regulation of SSASs should discuss whether more needs to be done by TPR in ensuring trustees are acting properly and HMRC in monitoring whether there is any abuse of the tax rules. Regulation by the FCA is unnecessary and likely a bad fit.

Andrew Roberts is head of SSAS at Barnett Waddingham LLP