One cannot overstate enough how big of a deal it was 30 years ago when rules were introduced to allow people to manage their pensions and choose where to invest them.
In those three decades, self-invested personal pensions have gone through big changes as a result of regulation, the prevalence of technology and consolidation.
When the Financial Services Compensation Scheme announced that its final levy for 2019-20 was going to be £16m more than forecast, it blamed some of the increase on the number of claims expected against Sipp operators.
The bulk of the pension claims it expected in 2019-20 would continue to arise from bad advice to transfer retirement savings out of occupational schemes and into Sipps – usually with a view to investment in risky and illiquid assets.
Tom Selby, senior analyst at AJ Bell, says: “It’s been a difficult thing for legitimate providers to avoid being tarnished with the same brush as other providers, who allowed all sorts of esoteric investments that have not worked out into their Sipps. The problem has never been with the Sipp.
Key Points
- Sipps have gone through enormous change since they launched in 1989.
- They have benefited from big changes in pension legislation.
- There are far fewer Sipp providers than there used to be.
“The Sipp is just a tax wrapper used to allow people to invest in things they want in a tax-efficient way. The problem has always been the investment at the other end of the product and the due diligence providers have or have not done on those products.”
Sipps were first introduced in the 1989 Budget. A Joint Office Memorandum later that year established which investments were permitted investments.
Further regulation followed, and on A-Day on 6 April 2006 Sipps became registered pension schemes. From 2007 they were regulated by what was then the Financial Services Authority.
The main advantage of a Sipp over a traditional personal pension is the level of investment flexibility the member has.
The range of available investments is much wider than a standard personal pension and may include: UK and overseas stocks and shares; unlisted shares; unit trusts; investment trusts; open-ended investment companies; investment-grade gold bullion; and commercial property, among many others.
They started out as a way for high-net-worth clients to invest in sophisticated investments. They were subsequently made accessible for the mainstream, but they were then abused, as unsophisticated investors were mis-sold into putting their money into questionable investments, which inevitably ended up failing.
Running a tight Sipp
There are now capital adequacy requirements for Sipp providers, which means those holding more esoteric assets need to have more capital in reserve. These rules were introduced in 2016 by the regulator and were designed to ensure a company can wind-up in an orderly fashion.
Mr Selby says: “It was really the demise of defined benefit pensions in the workplace, after the 1989 Budget, that really saw personal pensions and Sipps start to see increased take-up and popularity in the UK.
“Those initial versions of Sipps would have been quite niche products. They would have entirely been sold by IFAs and very much focused on high-net-worth customers; nothing like the mass market of Sipps you see today.”
Had any commentators at the time expected regulation of Sipps to inhibit market growth they would have been wrong. Indeed, by the end of 2013, the number of Sipps in existence was estimated to have gone above 1m for the first time. This was despite close regulatory scrutiny and a couple of thematic reviews.
Stephen McPhillips, technical sales director at Dentons Pension Management, says: “These reviews were considered necessary as the regulator reacted to a market that it considered was ‘changing’ with scope for ‘poor firm conduct’ and ‘potential for significant consumer detriment’.
“As far back as 2012, the regulator expressed concerns over ‘inadequate controls over the investments held within some Sipps’.
“Pension freedoms came along in 2015 and triggered further significant growth in the Sipp market.”
Today, the Sipp product ranges from the do-it-yourself to specialist investments used by advisers and wealth managers.
It is a market that has become polarised, following several years of provider failures, which has led to court disputes.
Mr McPhillips adds: “Some providers have chosen to focus on limited choice/streamlined investments (to the exclusion of more sophisticated investments), while some other providers continue to allow a wide range of investments to meet clients’ sometimes diverse investment needs.
“For the latter, it is likely that robust due diligence work is carried out on any non-standard investment before it is accepted into the provider’s book. For some, the trigger for increased levels of due diligence has been the recent court cases.”
The decline of Sipps
For Elaine Turtle, a director at DP Pensions: “One of the sad impacts of change over the past 30 years of the Sipp market has been consolidation”.
Ms Turtle says: “At one point there were over 120 Sipp providers in the UK, but this has been diminishing over time.
“Some consolidation was for the right reasons, and what we have now is a better capitalised sector, but my main concern is that this consolidation will stifle innovation and inhibit the freedoms envisaged by the chancellor back in 1989.”
Market fees also vary, but broadly across the sector there has been competition on fees, as the shift towards online continues.
Technology makes it easier to serve more customers, and companies can benefit from economies of scale, meaning they can do certain things at a lower cost. And with Vanguard’s recent low-cost Sipp offering, this is set to put further pressure on fees.
Greg Kingston, group communications director at Curtis Banks, says: “It is a really positive move. Vanguard’s offering, for example, is really interesting and potentially disruptive.
“But the advised and the direct markets are fundamentally different, and although they overlap at points they don’t necessarily always compete.
“It will drive further improvements in the market though – the direct savers in these low-cost direct Sipps are tomorrow’s customers for advisers.
“In that market in the future, the successful Sipp providers will be supporting advisers to help them demonstrate the value that their financial advice can add.”
Rather than creating a more robust and resilient market, Simon Biddlecombe, account director at Equiniti Hazell Carr, says the capital adequacy rules have since caused it to retract. For example, providers have had to raise further capital and increase scrutiny by putting in place eligibility criteria for customers, which has now limited choice.
Mr Biddlecombe adds: “Similarly, on finding many consumers were taking tax-free cash from their pensions and were ‘insufficiently engaged’, the Financial Conduct Authority embarked upon its Retirement Outcomes Review to try to put in place measures to provide long-term protection.”
The FCA proposed the introduction of investment options or ‘pathways’ for non-advised customers that would be aligned with the customer’s retirement objectives. But Mr Biddlecombe says it could be costly to implement and govern.
In the future, whatever evolution they go through, it is clear that Sipps are here to stay.
Ima Jackson-Obot is deputy features editor at Financial Adviser and FTAdviser
