As debates continue to rage over value for money and risky investments, we look at what the future holds
Just a single sentence in a Budget can lead to a world of change for advisers and their clients. “Let me be clear: no one will have to buy an annuity” were the famous words that ushered in the pension freedoms.
On 14 March 1989, then chancellor Nigel Lawson uttered a similarly powerful phrase: “I propose to make it easier for people in personal pension schemes to manage their own investments.”
That sentence led to the creation of the Sipp, which celebrates its 30th birthday this month. The Sipp’s history is important as its evolution as a proposition has anticipated profound changes in how people work and retire in society.
Initially it was a costly proposition used by a minority of wealthy investors who supported their family businesses or purchased commercial property via the Sipp. The innovative aspect of the Sipp was the flexibility it brought to investors whose experience up to that point was being in secure, but restrictive defined benefit plans. In terms of fund choice, clients only had the option of with-profits or in-house funds with a traditional investment manager such as Aegon.
The gradual erosion of DB schemes and the shift towards defined contribution plans where the individual has to look after themselves has arguably made the climate more favourable for the Sipp.
The establishment of platforms in the early 2000s has also played a role as technology enabled Sipps to be run at a lower cost and allowed less affluent consumers to use them. The steady rise of tracker funds championed by the late founder of Vanguard John Bogle, the rise of robo-advice and scrutiny of high fees on other pension products have also been tailwinds for the Sipp industry.
Nonetheless, that narrative has not been without its interruptions and the Sipp industry is working through the legacy of unregulated investments that has caught up with it.
A number of Sipp providers allowed clients to invest in esoteric assets, which laid the groundwork for two significant court cases last year, both of which date back to purchases made as long ago as 2011.
Berkeley Burke and Carey Pensions found themselves accused of not vetting unregulated investments that subsequently failed. The FCA contributed evidence, and these cases still are not settled. Clearly the sector is at a significant turning point on its 30th anniversary. This makes it all the more appropriate to take stock of where the Sipp has been and where it might be going.
The Sipp revolution
All the commentators and experts Money Marketing spoke to believe the Sipp was the first step into the retirement landscape advisers and clients now find themselves in, where a premium is put on individual choice.
They also say that, in general, Sipps have given clients value for money. A poll on the Money Marketing website shows 68 per cent believe the product will still exist in 30 years’ time despite current difficulties, compared to 22 per cent who say it will not and 9 per cent who are unsure.
Curtis Banks pensions technical manager Jessica List says: “The introduction of Sipps revolutionised the pensions sector. Chancellor Nigel Lawson took a bold step and provided more investment freedom to pension savers than ever before.
“Sipps have been a product of choice for advisers and clients, helping them to structure their pension investments in a way that works for them.
“But it is how consumers take their pension income that has been the biggest single change that Sipps have helped introduce.
“Sipps were the first pension products to truly challenge the necessity to purchase an annuity, and paved the way for pension freedoms that have subsequently disrupted the retirement landscape.”
Although the first Sipps offered flexibility, it took them more than a decade to become more widely used, according to Scottish Widows head of individual pension propositions Catherine Stewart.
She says that a combination of factors since 2000 has pushed them into the mainstream, such as the A-Day pensions reforms introduced in April 2006.
This legislation opened up new possibilities for Sipp investors and established the principle of a product which combined accumulation and decumulation, she adds.
Stewart also says it became the norm for Sipps to offer a much wider range of investment options while technology pushed down costs and broadened access for clients.
Other changes such as the growth in self-employment since the financial crisis and further legislative change has driven up the use of the Sipp.
One of the most important regulatory developments was the decision to shift Sipp supervision from HM Revenue and Customs to then regulator the FSA in April 2007.
Carey Pensions chief executive Christine Hallett, who has been in the industry for 30 years, argues it is a decision the Sipp industry is still feeling the effects of.
She says: “We have gone from a simple and flexible product regulated by HMRC to a complicated product where people can do anything.
“That might have been taken to the extreme in some cases.
“Unfortunately for members and the Sipp industry there have been untoward investment propositions that have pulled the wool over the eyes of members and Sipp providers.
“We have got a situation where clients wanted to make their own choices, but unfortunately some of these have not delivered on the promises. Sadly everyone in the Sipp industry has become a bit risk-averse.
“The industry is going through a bit of turmoil but I believe we will come through that and come out stronger.”
Some of that turmoil has been experienced by Carey Pensions itself. During a High Court hearing in March last year Carey Pensions claimed it did not break conduct of business rules when it set up a Sipp for a client.
In the case, lorry driver Russell Adams alleges Carey Pensions missold him a Sipp in February 2012, when he was paid an inducement of £4,000 into his savings account to encourage him to put money into rental scheme Store First.
The case is seen as a pivotal ruling on whether Sipp providers should take responsibility for unsuitable investments.
In February Aim-listed pensions provider STM Group completed the acquisition of Carey Pensions following FCA approval. Berkeley Burke was also subject to a similar claim and is currently looking for a buyer.
Despite these ongoing legal battles Hallett is positive about the future of the Sipp and says: “We believe Sipps are still a good way for advised clients to diversify investments. A Sipp is a product where people can invest, take advice and diversify across a range of assets that can be accepted into a particular providers’ proposition.
“It has become more restricted and rightly so given what transpired from 2011 to 2013 [in terms of unregulated investments]. We will never get back to that situation, but well-controlled and well-structured asset classes add value to clients and will continue to do so. The regulator needs to focus on less ethical behaviour.”
Head to head: Will the Sipp survive another 30 years?
Equanimity managing director
I would certainly hope and expect the Sipp to carry on for another 30 years as it transformed the way clients invest as they had a wider investment range for the first time.
It would be amazing if the lending facilities are brought back to where they were several years ago. There is a restriction on how much you can borrow to purchase a commercial property–that is disappointing.
If this was lifted it would certainly make a big difference to clients, particularly to business owners, who could use their pension to buy a commercial property through a Sipp.
First Wealth partner
It depends on legislative changes, how much costs will come down and how open traditional pensions providers are to changing their contracts to integrate with the Sipp market.
Big providers cannot do certain things they might like to and if legislation changes it would create a level playing field for Sipps and personal pensions.
As fees come down some of the flexibility in Sipps might be incorporated into normal personal pensions as standard or be bolted on.
There is consolidation in the Sipp market and I wonder if some life insurers might look to get involved.
The fight over the future
The history of the Sipp has not been without drama, but this inspires two questions: has the Sipp in general given clients value for money, and what does its future look like?
Investment Quorum director Petronella West says she has been around as long as Sipps have and believes they were very inventive to begin with as they brought sophistication to investors.
But she questions: “Why would you use a Sipp now? The traditional Sipp is a thing of the past, as now you can get access to any investment you want. The flexibility of a Sipp has now gone mainstream. Technology is only going to drive fees down and the speed at which it is delivering solutions means clients will be paying lower charges as time goes on.”
EQ Investors director Jeannie Boyle says it is important to distinguish between full Sipps and cheaper solutions.
“There is a huge difference across the range of Sipps in the market. You can have a Sipp that costs several hundred pounds a year or cheaper ones which are just platform Sipps that offer flexible access and a large range of funds to invest in.
“The majority of Sipps are pensions that offer a wide range of access to funds on a platform that can be accessed flexibly.
“Generally they are pretty cost-effective for clients and the fee comes from the investment and service provided by an adviser. Most clients do not need to pay for a commercial facility or borrowing. It is simply not relevant.”
The Pensions Experts director Heather Dunne says that the Sipp is facing several challenges that she has seen before with other products.
“The negative is people have used it for non-regulated investments and unfortunately that has given Sipps a dirty name with the regulator,” she says.
“The other thing which is happening is consolidation.
“Sipp firms that were established with small portfolios are consolidating but this happened with insurance companies and the SSAS market too.
“The Sipp will exist in the future. It might get changed and altered but so does everything else.”
Royal London head of business development Clare Moffat says it is likely the Sipp will be here in 30 years’ time, but the industry must clean up its act.
“The thematic review of pension switching in 2009 highlighted the issue of clients being switched into Sipps, paying the higher charges but not always using the self-invested functionality.
“The industry needs to ensure that the lessons from the past are remembered, and while a Sipp can be the perfect solution for one client, for another it may just be extra cost, but without much extra benefit.”
The Sipp timeline: From niche product to mass appeal
March 1989: Chancellor Nigel Lawson launches Sipp in the Budget with the words: “I propose to make it easier for people in personal pension schemes to manage their own investments.”
March 1990: First Sipp created by James Hay.
July 2002: Hargreaves Lansdown launches its first Sipp.
April 2007: FSA begins regulating Sipps.
September 2009: The FSA publishes a thematic review about the due diligence Sipp providers are expected to undertake.
December 2011: Hargreaves Lansdown hits a milestone of 100,000 Sipp clients, reflecting how mainstream Sipps have become.
October 2012: The FSA publishes a follow-up thematic review, assessing due diligence from Sipp operators for a second time.
October 2013: The FCA reiterates the responsibilities Sipp providers have, noting “[these are] not new or amended requirements but a reminder of regulatory responsibilities that became a requirement in April 2007”.
July 2014: FCA writes Dear CEO letter to Sipp providers about due diligence procedures and their adherence to prudential rules.
2015: The Sipp industry starts to see consolidation as large Sipp providers take over smaller ones.
March to October 2018: Sipp industry follows two high-profile court cases involving Berkeley Burke and Carey Pensions. The cases concern whether they should have done more to vet unregulated investments that subsequently failed.
November 2018: Money Marketing learns the FCA has written another letter to Sipp providers asking them to give information about their business activity.
February 2019: FCA chief executive Andrew Bailey tells MPs on the Treasury select committee it will review non-standard assets next year. He also says the “jury is still out” on whether Sipp providers have enough capital to pay out compensation for any potential claims.