This year marks three decades since the Sipp first entered advisers’ vocabularies.
Sipps have had an eventful history and given millions of savers a flexible way of planning for their retirement, with investment decisions entirely within their control.
Looking back to 1989, it all started with the Budget, as then-chancellor Nigel Lawson introduced the Joint Office Memorandum 101, a simple do and do-not-do list for those investing their own pensions.
The following year, the first Sipps began to be offered to savers, and started with a very specific audience.
Almary Green managing director Carl Lamb says: “The idea in 1989 was to give business owners and professional investors a wider range of choice.
“It was innovative at the time and the right thing to do. Until then, all you had was the SSAS but, after 1989, if you didn’t have the sponsoring employer, then you could then use the Sipp legislation.”
Ovation Finance chairman Chris Budd worked with Sipps in 1998 when he was a pension trustee consultant at Pointon York. Even though there were only a few thousand in existence, Budd recalls how popular they were within their own niche.
He says: “Coming along with something that got rid of all product charges and simply had a flat fee was actually quite an easy sell to a lot of people. For the professional clients, it was a very attractive proposition and business owners absolutely loved it.
“It meant they could use their pension fund to buy the property, the rent would then go into the business, and then into their pension, rather than the third party.”
Things changed drastically for Sipps on 6 April 2006 when they were propelled into the mainstream. On a date now known as A-Day, the 2004 Finance Act was introduced to clean up and reset the pension legislation landscape.
As well as setting the record straight on issues such as investing in occu-pational and personal pensions at the same time, the lifetime allowance and a single tax regime, new rules were brought in around Sipps, aligning them with SSASs.
When Sipps were made registered pension schemes, they fell under FSA regulation the following year, in 2007. Wealth management firm Hurley Partners pension director Martin Tilley believes Sipps got the name of the “new kid on the block” and became a financial fashion accessory for individual portfolios.
He adds: “Many of the platforms named their products Sipps when they were, in fact, multi-fund or share platforms within a personal pension wrapper.
“The fact that individuals could go direct to platforms and self-invest meant that, technically, the plans were Sipps, although they were not the original intended audience.
“It was this that brought the products into the mainstream. Had we had some differentiation over these products, we may have had a more clearly defined market now.”
Once mass-marketed and with all the tax benefits of other pension products, Sipps took off. By 2016, it was estimated there were 1.4 million Sipps in the UK, totalling £175bn in assets, according to consultants at MoretoSipps. There are now estimated to be around 2 million in existence and GlobalData projects the market to grow by £1.9bn in the next year.
Some advisers believe Sipps should have stayed as they were, such as Lamb, who thinks they are best suited to their intended niche audience.
“They’re now marketed as a mass-market product and were never designed that way; they were always for the right person with the right set of circumstances,” he says.
The debate rages on over suitability, but Sipps were opened to even more demand in 2015 as then-chancellor George Osborne’s pension freedoms announcement handed yet more control to savers, who could now transfer to Sipps.
Over time, with millions of consumers’ pensions being invested into these products, Sipps fell under greater regulatory scrutiny. This culminated in September 2016 when the FCA introduced new capital adequacy requirements for Sipp providers. A new formula was introduced to designate how much reserve capital a provider should keep on its books, based wholly or partly on the amount of non-standard assets held.
The non-standard investment issue would come to a head in 2018, which became the annus horribilis for the Sipp world. That year, schemes were dealt two black eyes: Carey Pensions became the subject of legal action over its role in permitting high-risk investments that resulted in losses. The judgment is still looming and Carey Pensions has since been acquired by Aim-listed STM Group.
Then, Berkeley Burke lost an appeal against a Financial Ombudsman Service ruling over a client who had lost their savings in a Sipp.
That ruling, compounded by the lost appeal, meant providers would likely need to carry out stricter due diligence on their investments – even execution-only platforms.
Although an FCA ban did not follow, with the regulator claiming such an action would not be proportionate, the regulator wrote a Dear CEO letter to the Sipp sector, reminding providers of their due diligence responsibilities. Although he says just 10 per cent of Sipps may carry unregulated investments, Tilley feels these products are a victim of their own success.
He says: “What has happened, as a result of the growth in the number of Sipp providers permitted by the opening of the market by the regulator in 2007, is that too many providers were chasing too small a market, leading them to accept inappropriate ‘assets’ to enable them to obtain critical mass and profitability.”
He adds: “The damage done has been well documented, and rightly so, to warn others of the perils of self-investment and non-standard assets.
“The door has been well and truly closed by regulatory thematic reviews and direct intervention so no damage should be done, but plenty already has.”
The future for non-standard Sipps
Within the world of Sipps, those that include non-standard investments could be facing an uncertain future.
These products have thrived on the flexibility and freedom they afford savers, but could this be their downfall?
The non-standard part of these investments simply comes down to their liquidity timeframes. If an asset can be valued and sold within 30 days, then it is considered a standard investment by the regulator. These include readily tradeable securities such as shares and corporate bonds.
The non-standard label can apply to assets such as longer-term deposits and commercial property – something that has been hotly debated in recent years
The problem remains that Sipps, by their very design and appeal, hand the investment control directly to the client, who is not guaranteed to fully understand what they are investing in. Faced with a vast array of investment options, it is up to them to decide what they want to include in their Sipps and how much of it.
As retirement solutions, Postcard Planning founder Rohan Sivajoti likes the flexibility and tax status afforded to Sipps. However, he is wary about the risks their flexibility can lead them to.
“In general, it is important that due diligence is done before an investment is made. There needs to be strong communication around this between the client, the adviser and the product provider,” he says.
“I think it is quite a risk you can invest in anything, so maybe it just needs to be redefined. You can see where the lines are blurred.”
The debate over non-standard investments and their place in Sipps really caught fire in 2018 after the Berkeley Burke case. The provider had gone to court to appeal against a decision from the FOS which it then lost, forcing Berkeley Burke to compensate a client over poor due diligence around a non-standard investment-based Sipp.
From a product provider standpoint, this ruling meant that firms now needed to ensure investments were suitable, even if they were execution-only platforms.
Obviously, this creates more work and thus starts to eat into the margins such providers have established.
However, these are self-invested products, so where does the responsibility lie?
Some advisers, such as Ovation’s Budd, think it lies with the buyer of the Sipp.
“The information is readily available, and things are a lot more transparent now. If there is some deceit or something illegitimate going on then that’s another matter.
But DIY investors who are given the responsibility to invest are also given the responsibility to do their due diligence,” he adds.
What has not helped the financial advice industry, as it has strived to improve customer service and embrace regulation in a new-look post-RDR era, is that non-standard investments have been peddled by some scammers and unregulated advisers. However, Budd points out that while such scams are reprehensible, they are not reflective of Sipps in general. Budd says: “There are always going to be unscrupulous people who don’t do very nice things.
“I don’t think you can overlook all the good things Sipps have done because of some bad eggs. The Sipp providers have generally been good at policing these products.”
However, Sivajoti still thinks more education can be offered around Sipps, and especially around the terminology of regulated and unregulated assets. He says: “Sipps have an image problem. It is not the product; it is what is in them, and there should be education around this.
“I think there should be a clearer line around what is regulated and what is unregulated. Right now, it is not clear for the layperson.”
The onus of responsibility will remain with providers and buyers as, even in the aftermath of the Berkeley Burke ruling, the FCA clarified it would not be banning unregulated investments in the Sipp space as this would be a disproportionate response.
Lamb thinks more can be done by providers to improve customer protection.
“The important thing is people realise what they are getting themselves into,” he says. “Most of the Sipp work I do is people buying commercial property and land.
That is an illiquid asset by technical definition but it’s an illiquid definition you can actually touch. With other assets, is this the case? How much do people really understand this?
“I think when anybody buys a Sipp, there should be a factsheet that states the definition of different kinds of Sipps so they know exactly what they’re getting into.
“I think more could be done and more responsibility should be laid at the doors of Sipp trustees, but we are now seeing this already.”
Encouragingly, more Sipp providers are choosing to be safer than sorry and are opting out of the non-regulated investment space.
Tilley thinks this is a proportionate response and welcomes it – in part due to the fact these products’ originally intended audience still has a demand for them.
He says: “Non-standard assets do have a place in the market for individuals who are sufficiently know-ledgeable on the assets they intend to adopt. However, I’d suggest that this is less than 5 per cent of the pension population.
“Of these [providers still offering non-standard investments], they now have very strong due diligence processes in place, internal risk assessments and client acceptance criteria, that mean future investment scandals and scams should not be possible. As a result, these assets do continue to have a limited place for experienced investors, which is where the market should have been throughout.”
While uncertainty lingers over non-standard investments, the popularity of the control Sipps offer savers has sustained – especially as increasing numbers of people are freeing up their pots from the age of 55.
Speaking of the success of the Sipp, Budd says it was a “natural evolution” and sees nothing but positives. He adds: “A pension is simply a tax-exempt investment. Who wouldn’t want a tax-exempt trust fund? And yet you say pensions and people are full of dismay because of the old pension providers and their products.”