Thousands of investor claims about investments made into self-invested personal pensions are still pending, leaving both advisers and providers exposed to costly claims, according to the 'Father of Sipps'.
John Moret, who was a director of Provident Life when it offered its first Sipp 25 years ago, and who is now principal at advice firm More2Sipps, complies an annual report on the state of the market.
He has estimated there could be 10,000 Sipp related claims in the pipeline - but as many as 50,000 investors with potential grounds for complaint.
Central to his calculations is the issue of what the Financial Conduct Authority terms 'non-mainstream investments', which tend to be more exotic, higher risk, often unregulated projects such as Brazilian teak farms or storage pods.
Mr Moret said the average exposure to these non-standard investments across all Sipp providers is around 2.5 per cent of the total assets, or between £5bn to £6bn.
He said: “That potentially implies there are more than 50,000 Sipp investors with exposure to non-standard investments.
“Now, not all these investments will be problematic, but conservatively if we assume 20 per cent are potentially likely to lead to legal action or ombudsman’s claims, that implies over 10,000 investor claims are pending.”
This figure could be even bigger, Mr Moret warned, and those claims are not uniformly distributed across all Sipp providers, he added.
Since September 2016, when the Financial Conduct Authority introduced new capital adequacy rules to the market, Sipp providers’ assets are divided into standard and non-standard.
The higher the proportion of non-standard assets, the greater the capital that is required to be held, in line with a higher perceived level of risk.
A series of high-profile problems for unregulated investments, such as Harlequin, Connaught and Stirling Mortimer, have drawn attention to these types of assets.
However who would pay for the avalanche of Sipp-related claims predicted by Mr Moret is something of a grey area.
So far advisers have borne the brunt of the claims - and associated costs - on the grounds the advice to invest in the non-standard assets was unsuitable.
The compensation paid to investors via the Financial Services Compensation Scheme who were holding their pensions in Sipps went up by 35 per cent to £105m in 2016 to 2017, paid for by financial advisers via a levy.
The FSCS’s annual report said of the Sipp-related claims increase: “These investments are often high risk and unsuitable for most investors. Their riskiness means some investments inevitably fail and become illiquid."
However, when it comes to possible future claims, it is unknown the extent of the Sipp provider liability, the redress that may be required and the extent to which the involvement of advisers may lead to some mitigation of the claim, Mr Moret said.
He said: “Also, it appears that some legal advisers to individual investors are suggesting that pursuing a claim through the courts rather than through the ombudsman may actually result in a better financial outcome for the investor."