Moves by self-invested personal pension (Sipp) providers to carve out bad assets into a separate business before selling their firm has face criticism from advisers, but experts are warning the practice is set to increase.
Providers worried about some of the investments they have allowed retirement savers to back via their business have been overhauling their asset books in recent months.
The outcome is often to pass, through sale or acquisition, the healthy book to a new provider, while the fate of the more worrisome assets is generally unclear.
Often these 'bad assets' are filled with non-performing investments such as the likes of Harlequin and Ethical Forestry.
Carey Pensions carried out such action on its book earlier this year and is reportedly looking to sell its good Sipp.
The Lifetime Sipp also has a deal with Hartley Pensions, which will see the provider acquire the assets with a view to helping wind down the “tainted” book, although Hartley was adamant Lifetime did not have a split book.
Hartley could not comment on the deal at this stage but under agreements put in place previously Lifetime Sipp transferred 40 per cent of its Sipps to Hartley in January, before appointing administrators two months later.
Martin Tilley, director of technical services at Dentons Pensions Management, said more of this practice could be on the horizon as the outcome of a decisive case against Carey Pensions looms, as there are few providers out there which have had no exposure to troubled assets.
The drawback of this practice is that bad assets can be pushed on to the Financial Services Compensation Scheme (FSCS), which is funded by the industry and does not pay out more than £50,000 on failed investments.
Depending on the nature of the complaint, the cost of dealing with it can fall to financial advisers.
Investors with sums above the FSCS £50,000 limit invested often miss out on redress as well.
On the positive side, investors in the good books are shielded from potential liabilities their Sipp operator might otherwise face.
Carey is fighting an investor who argued it had a duty of care towards him when allowing him to set up a Sipp to invest in unregulated investments, despite the sale being classed as execution-only.
The Sipp firm argued it is not responsible for the client’s failed investments as he invested on an execution-only basis and signed a contract saying this was his choice.
Mr Tilley said: “It could have some people jumping the gun, as we don’t know exactly what the court cases come out with. If the court determines the Sipp providers are not complying with the regulatory rules we will see a lot of these cases.”
Advisers are concerned about this tactic because of the potential liabilities falling on the FSCS.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: “Whilst it would be desirable if no Sipp held bad assets, part of the recovery should be for the FSCS or liquidator to sell off assets rather than the current firm.”
Darren Cooke, Chartered financial planner at Red Circle Financial Planning, said: “This [practice] allows [Sipp firms] to dump their responsibilities, collapse that part of the business and walk away leaving it all to the FSCS. Any chance of any money coming to help cover the liabilities disappears.”
Under HMRC rules the Sipp administrator is the party ultimately responsible for the settlement of any tax charges on toxic, taxable assets levied on the administrator, whereas under FCA rules the Sipp operator holds regulatory responsibility for the book.
If a new Sipp provider takes over the role of provider and administrator, they are taking on the responsibilities of the administrator too, which is why some Sipp providers will establish a new registered Sipp with HMRC to hold only the clean book.
Mark Smith, chief operating officer at Mattioli Woods, said a disconnect in rules around Sipp asset liability meant splitting the books before selling was often the easiest and least costly option for the Sipp operator.
Mattioli has been involved in the rescue of failed Sipp books, having helped transfer the assets of about 1,000 clients of Stadia Trustees when it was forced to cease accepting new business after varying its regulatory permissions in 2013, to its own firm.
Mr Smith said HMRC’s rules were designed to prevent abuse, so schemes could not simply appoint a new administrator to dispose of liabilities.
But he added: “It just means we end up in this position and as a result it could ultimately become impossible where you have those liabilities to go to the market and sell your business. Splitting is the easiest and quickest way but it’s not ideal because you end up with lots of people being pushed to the FSCS.”
Mr Tilley said the last thing the regulator wanted was a disorderly wind-up where people relied on the capital adequacy of the Sipp provider to transfer their assets out.
He also said from a potential buyer’s perspective the only way Dentons would take on an ailing firm would be if it could come to an agreement with the FCA and HMRC that there were be no liabilities. “It would have to be by special agreement,” he said.
HMRC did not want to comment on its position with regards to Sipp splitting but confirmed if the scheme administrator of a pension scheme changes, the liabilities that arose before the change become liabilities of the new scheme administrator, with the exception of penalties.
carmen.reichman@ft.com
