SIPPOct 16 2017

Sipps: Time to move beyond policy dysfunction

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Sipps: Time to move beyond policy dysfunction

Any assessment of the growth of the self-invested personal pensions (Sipp) market must take into account two topics: pensions freedoms and defined benefit (DB) pension transfers. 

The latter area has hogged the headlines this year, and in light of the rise in insistent client numbers, Sipp providers should ask themselves what they can and do what they can to ensure their responsibilities are being met.

In truth, the two subjects are inextricably linked. The inexorable rise in transfers from DB pensions is undoubtedly a direct consequence of the emancipation of defined contribution (DC) pension funds that former chancellor George Osborne ushered in back in 2015.

But despite this causal relationship, the two topics also lay bare the current incoherence within the pension landscape, and the impact this is having on the Sipp marketplace; particularly where pension freedoms and DB transfers are concerned.

This dysfunctional situation is largely attributable to two things. Firstly, the disconnect that persists between the regulator that oversees Sipps (the FCA) and the regulator responsible for DB pension schemes (The Pensions Regulator). 

Secondly, the primary driver behind pension freedoms, as far as HM Treasury and the government are concerned. Namely, to accelerate the pensions tax-take to help plug the UK budget deficit – a policy aim that has, to date, been significantly more successful than the original tax estimates forecast.

This incoherence has recently been brought into sharp relief by a combination of more short-term tweaks (step forward the money purchase annual allowance reduction), the battle for Brexit and the (arguably unnecessary and self-defeating) snap general election.

Potential solutions

Two potential solutions to bring these disparate elements into one cohesive fusion are, firstly, legislating for partial transfers from DB schemes (to DC pension schemes) to become available for all such schemes and, secondly, a renewed call for the creation of a non-political pensions council to oversee all policies concerning pensions. This would permit pensions to be truly apolitical and long-term in nature, and to attempt to overcome the inter-generational unfairness that pervades the sector’s landscape.

A recent report, entitled ‘Helping defined benefit members make better retirement decisions’, called for a limited legal right to partially transfer a saver’s accrued benefits within their DB pension scheme. This came in response to a poll of 100 such schemes in May 2017, which revealed that just one in six offered a partial transfer option.

Steve Webb, former pensions minister and co-author of the report for Royal London, stated that “the all-or-nothing defined benefit transfer approach is too risky, and partial transfers are a good way of de-risking for long serving workers.” 

Meanwhile, a survey of financial advisers, which was also conducted in May 2017, saw about three-fifths of them strongly supporting the right for members to transfer a proportion, rather than the entirety, of their accrued benefits out of their DB pension scheme.

This cliff-edge decision for DB members perpetuates the uneasiness within the DB transfer marketplace, with all of the participants affected in some way. 

For the administrators of DB schemes, transfer value requests are substantially higher, as are the number of actual transfers out, with the resulting cost and resource implications made all too clear. 

For financial advisers, the mandatory need for a transferring member to obtain regulated advice where the cash-equivalent transfer value is £30,000 or more has had consequences of its own. 

It has produced a spike in demand for advice that can only be provided by those with the requisite pension transfer qualifications. This is taking place against a backdrop of delayed and insufficient guidance from the FCA, and professional indemnity insurers who are becoming increasingly nervous in the face of seven-figure transfer values. 

For Sipp providers, their position at the end of the pension transfer food-chain precipitates an unwarranted reactive stance, often having to process everything at the 11th hour of a three-month transfer value guarantee period, and requires them to instil a firm in-house policy where insistent clients are concerned. 

By contrast, a partial transfer would give those individuals with accrued benefits in a DB scheme more flexibility over how much of those benefits are transferred into a DC pension scheme and how much is retained in the ceding scheme. This would allow them to take sensible advantage of the pension freedoms, while retaining an element of certainty for a proportion of their overall pension provision. 

It is widely acknowledged that there would be challenges in creating a legal right to a partial transfer, but this laudable aim would go some way to ease the current disconnect between DB and DC pension benefits, while at the same time generating the need for the FCA and The Pensions Regulator to work together to expedite its implementation.

The concept of a Pension Council, or similar non-governmental committee overseeing the development and implementation of long-term pension policy, is not new. It has been raised before on numerous occasions, and typically dismissed by politicians and other vested interests as being unwieldy or unworkable.

However, the idea has recently been resurrected by Alan Pickering, the renowned and respected pension stalwart, as a means of seeking to end the knee-jerk approach to pension policy that has blighted Sipp providers, among many others. This has particularly been the case during the recent years of austerity as the government has sought new ways of raising revenue.

Mr Pickering’s comments reminded me of the occasion when I appeared with him on a question time panel for one of the regional groups of the Pensions Management Institute. 

The event took place in March 2015, just days before the pension freedoms were due to be launched. One of the questions from the audience concerned the so-called “second line of defence” requirements that I, and several of my colleagues, were grappling with at the time.

This provides yet another example of an incoherent approach to the same problem by the FCA and The Pensions Regulator – borne out of increasing political concerns that everyone with a DC pension would rush to cash it in as soon as possible after 6 April 2015 to spend it all on holidays, luxury goods and a new kitchen. 

As a regulated Sipp provider, we were at the time busily working our way through the FCA’s mandatory policy statement on the second line of defence requirements, which was only released on 27 February 2015, as well as putting together and testing processes, questionnaires, letters and signposts to Pension Wise, all of which had to be fully operational by 6 April.

By contrast, The Pension Regulator’s second line of defence release, which was issued in early March 2015, was not mandatory for the trustees and administrators of occupational pension schemes. 

It was conceived of as more of a good practice overview, with suggested wording for letters and so on. Other member communications were categorised within a flow chart designed to help deal with members’ requests to crystallise their pension benefits – particularly where advice or guidance had not first been sought.

The FCA’s “you will do this” approach contrasted markedly with The Pension Regulator’s “you might like to consider doing this” policy, and suggested that little, if no, consultation took place between the two bodies prior to the release of their respective publications. 

This dysfunctional state largely remains in place. An over-arching Pension Council, comprising individuals who understand pensions and are neither tied to – nor influenced by – the electoral cycle, could seek to ensure the regulators do work with each other and act in a consistent, joined-up way. 

It would also offer the pensions industry – including Sipp providers – the opportunity to move beyond the dysfunctional methods of the moment, and allow pensions to operate as a non-politicised, long-term savings vehicle for all.

James Jones-Tinsley is self-invested pensions technical specialist at Barnett Waddingham