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In the works

Group schemes Hargreaves Lansdown pensions research manager Tom McPhail says Sipps have exciting potential in the workplace and looks at how plan design is progressing

Group self-invested personal pensions are one of the few really positive stories that we can offer employers.

The industry has flirted with group Sipps for the past few years without getting very far with them but the next 12 months are likely to prove very interesting. There are several reasons for this optimism.

The final-salary sector is melting away as quickly and messily as an ice cream on a hot summer’s day. Rising costs and open-ended liabilities are driving the sector to terminal decline.

Employers are being pushed towards money-purchase pensions as the only viable option. Away from the public sector, there is no obvious commercial advantage for an employer in carrying the business risk of a final-salary scheme.

Yet the occupational money-purchase sector is also coming under increasing pressure, as the A-Day changes leave these schemes struggling by comparison with personal pensions. With benefit structures and contribution limits being harmonised from next April, employers are increasingly questioning why they would want to carry the liabilities and costs associated with a trust-based scheme, when they can deliver an identical benefit structure under personal pension rules.

The icing on the cake is that Sipps are in vogue at the moment. Investors are really interested in Sipps, in stark contrast to declining sales of stakeholder pensions.

The opportunities are substantial. Group Sipps have all the virtues of group personal pensions in terms of simplicity and flexibility, none of the drawbacks of occupational pensions and their trustee responsibilities, and they have the added attraction that investors can diversify into direct equity investments, property and more esoteric investments.

Group Sipps can be sold to run alongside existing occupational schemes next year as alternatives to AVCs. Therefore, the potential market for group Sipps now runs to millions. So where are the products coming from to satisfy this market?

The Sipp market is competitive, dynamic and growing fast. There are three types of provider competing in the market. Small professional firms, such as consulting actuaries or solicitors, offer full-fat bespoke products which are flexible but pricy. Insurance companies started with group personal pensions, then gained expertise in individual Sipps, and are now looking to merge these into one group Sipp product.

Finally, there are the investment specialists, such as stockbrokers and wrap providers. These started by offering flexible investment products, which they then turned into individual Sipps. Now, they are trying to tailor these for the group market.

Insurance companies are the only providers in a position to pay any kind of indemnity commission and even they are struggling to accommodate the charges, while developing adequate administration. If you use a small provider or an investment specialist, then you have to be able to live off trail commission or charge fees, because they will not offer the commission levels which IFAs have enjoyed on group personal pensions.

So flexibility of income will be a prerequisite for an IFA looking to take advantage of the marketing opportunities offered by group Sipps.

There are also problems of scale in running group Sipps. It is all very well offering a property purchase service when you are dealing with clients one at a time but it is a challenge to cope with all the complexities of Sipps on a bigger scale.

The most likely answer is the semi-skimmed group Sipp which offers simple investment choices combined with a wider fund selection for more sophisticated employees.

All this can be delivered within a fairly simple charging structure. It is only when employees move into more specialised areas such as property purchase that additional fees and bespoke administration kick in.

A number of providers, such as Standard Life and Pointon York, have almost completed product development but no company has yet launched a genuinely flexible all-things-to-all-people group Sipp for medium to big employers. Yet I think it is conceivable that, in a few years, every money-purchase pension sold in the UK will be a Sipp.

The only fly in the ointment is the Department for Work and Pensions’ continuing prohibition on investing protected rights in a Sipp. The sooner this is overturned, the better.


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