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.
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.
There were then a number of events that influenced the Sipp market, leading it to becoming the personal pension of choice and not necessarily at a premium price.
In my view the development of stakeholder pensions in 2001 had a profound effect on pensions in the UK. While not being a success in terms of the purpose for which they were intended, they did bring about the concept of a charges cap. They also introduced the requirement for any comparison of pension options to begin with a stakeholder before looking at the added value of other options (the so-called RU64 test). While not being subject to the cap, Sipp providers were keen to be there or thereabouts, and their charges reflected this.
In 1995, the arrival of income drawdown and the option of an alternative to an annuity meant that specialist investment management was needed in retirement. This has only been enhanced by the subsequent developments of alternatively secured pension and flexible drawdown, and will be vital in light of the Budget 2014 proposals.
Above all, the financial services industry was undergoing structural change, assisted by the massive use of technology. The old model of commission-based charging was changing. The traditional business models became unsustainable and the leviathans of the large insurance companies were unable to adapt to the market quickly.
Both 2006 and 2007 saw changes in Sipp regulation, such that the shortlist of acceptable organisations that could be Sipp providers (banks, building societies and unit trust companies) was abolished and now any organisation could be a Sipp operator with the necessary regulatory status.
Sipp providers were no longer weighed down with legacy business and the online Sipp was fast becoming the norm, allowing costs to be controlled even more.
Fast forward to today and the market has moved on again. We are now in the world of platforms and wrap accounts, with Sipps just being one of the tax wrappers sitting on systems that offer investment choice, dealing and all the ancillary services. Sipps have become commoditised and, as long as there is not too much non-mainstream activity, can be charged as such.
There is a wide variance in what Sipp providers consider a Sipp to be. Definitions range from a personal pension with a choice of funds, to a full stockbroker service that can trade on world markets and across the board on investments. There are also still several providers offering ‘bespoke’ Sipps, perhaps alongside Ssases, where the product continues to be charged at a premium for the individual service provided.
The Sipp market was originally seen very much as a space for financial advisers and specialist fund managers, but in parallel a number of providers developed a direct-to-consumer offering. Over the years, perhaps assisted by the RDR, the number of DIY investors has continued to grow, with lessons being learned and business models improved.
The Sipp market has grown dramatically and there are now estimated to be over a million Sipps in force, although the wide definition makes it difficult to be exact.
Well what about the future? This year should be a big year for Sipps – we should get the final capital adequacy rules which are forecast to lead to some degree of consolidation in the market, and we will hear more about the FCA’s most recent thematic review. Platforms will continue to dominate in the Sipp market but I do think that there will be some ‘bespoke’ survivors. And who knows how the new retirement flexibility will impact the market? Surely it will be positive.
Mike Morrison is head of platform marketing at AJ Bell
Key points
- It is 25 years since the government of the day announced it would like to make it easier for people to manage their own pension funds.
- The concept of the Sipp opened the choice to pretty much the whole investment market.
- A number of providers developed a direct-to-consumer offering.
