Looking back, heading forward

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Self-Invested Pensions - May 2014

They say time flies when you are having fun, but I can barely believe that it is 25 years since the then chancellor, Nigel Lawson, said he would like to make it easier for people to manage their own pension funds. It was an announcement that heralded the development of self-invested personal pensions.

We were told that we could self-manage personal pensions. The key was to find a way of putting this into action. Previously, most personal pensions had a fairly traditional range of funds, normally managed by the insurance company provider. Consumer choice was not a prerequisite and few providers had funds that were attractive in all sectors. The introduction of Sipps allowed all this to change, but the key was to consider what was in the black box that insurers referred to as ‘personal pensions’.

In effect, when buying a personal pension a consumer was buying a bundle of services: pensions advice, pensions administration, investment advice and investment administration.

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If lucky they would get a company that was quite good at most of these things, but in most cases they were probably just average - they were buying a generalist rather than a specialist.

The concept of the Sipp opened the choice to pretty much the whole investment market, and the range of investments beyond those offered by pension providers was immense. Aside from the traditional managed funds there were unit trusts, investment trusts and individual equities. The geographical range of markets was similarly wide, and there was also the opportunity to invest directly into commercial property (an investment class previously only available to small self-administered schemes).

This was a time when investment markets were doing well and we were recognising that investment was a global and multi-faceted world. In response, some pension providers saw this as a real opportunity to unbundle and break open the black box, using specialists for the specific functions rather than generalists. A new kind of provider developed, one specialising in administration and with the ability to buy in or provide the other functions.

Sipps fell into a number of different categories depending on the provider involved. Some of the large insurance companies just expanded their range of investments to include funds from other speciality investment houses. Others created links with discretionary fund managers or stockbrokers and wrapped the personal pension rules around the investment portfolio to bring the pension tax advantages to bear. Some providers also specialised in more niche markets like commercial property, packaging services that allowed economies of scale and efficiencies in the market.

The key attraction of the Sipp was that clients were buying the wrapper and had influence over its contents, such that if investment objectives changed or performance was not as expected, the contents could be changed rather than the wrapper.

Originally Sipps were seen as a premium product and it was possible to charge the consumer for the cachet of having one as opposed to a standard personal pension. Sipps could be managed by the same people who managed private portfolios, and a large number of stockbrokers either set up Sipps or branded other providers’ products.