Since inception in 1991, self-invested personal pensions have changed from a niche product for sophisticated investors to a mass-market offering.
This popularity growth, and outflows from insured arrangements, led the Financial Services Authority to regulate Sipps from 2005. In 2014, it noted that of the £2trn of UK pension assets, around £100bn was held in Sipps. By 2017, this had grown to £230bn.
The market has since diverged, with many providers focusing on an online ‘DIY’ offering, allowing savers to manage their own investment choices from a widespread range of listed shares and funds. This has proved popular for those wanting to consolidate smaller pension pots and can be a cost-effective option, provided savers are confident making investment decisions. Alternatively, an adviser or discretionary fund manager can be appointed.
However, the original intent of Sipps was to provide maximum flexibility within prevailing pension legislation. It is this area that has drawn most attention, with the wide range of investments proving a double-edged sword for providers and investors.
With a list of allowable investments no longer published, it fell to individual providers to determine whether an investment was allowable. It led to the demise of providers who allowed access to investments that proved either unsuitable or fraudulent. This in turn led regulators and courts to ask whether providers had a duty of care in assessing not only whether an investment met pension rules, but also suitability for an individual. Furthermore, in many cases Sipps have been established to receive transfers from defined benefit schemes – also under the spotlight.
In the DB transfer market, there has been a reduction in firms and advisers offering advice, primarily due to regulatory increases and associated insurance costs. There remains strong demand for transfer advice, given that it is compulsory for consumers to take appropriate regulated advice for transfers of safeguarded benefits of more than £30,000. But the regulator is clearly concerned that transfers are being recommended in more cases than is suitable.
In the interim, it is likely the contraction of the market will increase costs as demand rises proportional to advisers in that market. The primary issue is that DB schemes provide a guaranteed income, while defined contribution (or money-purchase) schemes, including Sipps, are dependent on factors including investment returns, charges and, potentially, annuity rates.
In most cases advisers will look to model the likely outcome to a client of a DB transfer, but this is by no means guaranteed and therefore we may see an rise in comeback over time, especially where outcomes do not match expectations.
The combination of increased capital adequacy and scrutiny has led many providers to increase due diligence and improve processes around non-standard investments. So have we seen the peak of Sipp popularity, and will complaints continue?
Certainly the Sipp ‘brand’ has been tarnished, but an online search still reveals a range of alternative investments promising high returns.