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.
Regulatory obstacles
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.
It is typically the underlying investment that causes issues rather than the Sipp itself, with promised returns not materialising, timescales extending and communication breaking down. The cold calling ban will go some way towards halting the worst offenders.
However, there will certainly be more fall-out from existing Sipp investments, even if the market has adapted in terms of new business being written.
The Financial Ombudsman Service recently predicted the number of complaints about pensions and investments would remain broadly in line with this year (around 14,500). But it is perhaps likely that advisers and providers will see an increase in the number of complaints should investment markets remain difficult.
Falling investment values often trigger concerns around investment advice or management, transfer advice or costs. Not all claims will be upheld or be legitimate, but will increase the burden on regulators, providers and advisers.
In spite of this there remain significant advantages to bespoke Sipp platforms for the right investors. For example, the ability for business owners to hold commercial property through their pension can have significant wider advantages, as well as providing a regular income return for the Sipp.
Equally, those with investment experience or using a wealth manager can benefit from a wider range of assets and a tailored approach to suit risk profile.
Flexible options
It is also significant the flexibility of Sipps is not limited to investment, and can include creating family arrangements as well as more choice around withdrawal of benefits and passing capital to beneficiaries.
In all cases it will be important for Sipp providers to determine not only whether investments can be held in a Sipp, but whether it is appropriate for an individual or group. An investment suiting one investor’s portfolio may be completely unsuitable for another – depending on factors such as risk profile, timescales and experience.
It is important advisers continue to offer flexibility through both Sipps and small self-administered schemes, alongside technical consultancy, asset and wealth management to ensure clients receive the best advice for their circumstances.
This advice-led approach ensures investments are not seen as transactional, but are part of an overall retirement strategy bespoke to each client and regularly reviewed.
Thornton Wells is a consultant at Mattioli Woods
