The old adage “if it ain’t broke, don’t fix it” could perhaps be applied to the current discussion amongst pension providers on the subject of permitted investment lists, though I might also add the caveat, “if I had a hammer …. I’d beat out a warning”.
At a recent Association of Member-directed Pension Schemes workshop on 3 October, 71 per cent of survey respondents advocated the introduction of a permitted investment list for Sipps & SSASs.
In my opinion, the question this elicits is why has there been such a sea-change in such a short period of time? If you cast your mind back to the lead-up to A-Day, there was general euphoria around the whole idea of there being no investment restrictions for pensions (I’ll choose to ignore the fiasco surrounding residential property) and yet a mere seven years later it is being suggested that a ‘prescriptive’ list would be a good idea.
Let’s look at some of the arguments for and against the introduction of such a list, though it should always be remembered that the legislation is merely a framework on which each provider hangs their products and they will allow or disallow an investment based on their business model and the perceived risk to the business of holding that asset.
The arguments in favour
I believe there are three things driving providers’ desire for a defined list; regulation, litigation and liberation.
Sipps became regulated products in 2009 and the FCA is now embarking on their third thematic review of providers. One thread that appears to run through these reviews is where do the provider’s responsibilities start and or stop in relation to investments held within a Sipp. In my discussions with advisers, the general consensus is that advisers would be uncomfortable with providers ‘policing’ their investment advice recommendations; equally I find it difficult to conceive how a provider could determine whether a product was suitable without knowing the client’s full circumstances.
Even if a full factfind was supplied with the application to set up the pension, the provider would have to form an objective opinion as to whether it was suitable – “that way madness lies”.
This leads on to the next reason for providers’ concerns, namely litigation.
If the provider has carried out its due diligence and is prepared to allow the investment, would it still have to police the recommendation and determine if it is suitable. Would this not simply lead to another avenue for individuals seeking compensation should an investment not deliver what was expected?
Recently, there have been a couple of judgements made by the Pension Ombudsman Service in favour of the provider, where the member sought redress in such a situation.
However, in those particular instances the investments were made prior to the FSA October 2012 guidance for providers on initiating controls and procedures to identify any situation where there may be client detriment. It will be interesting to see the outcome of the first post October 2012 case.
The final point is that of pension liberation. By this I do not mean the current hot topic of the member transferring to another ‘pension’ arrangement and then accessing their fund early either by a loan or other means, but rather the use of particular investment vehicles to achieve similar ends. This can be in the form of the pension arrangement acquiring an asset for an inflated price, or where there is a side arrangement to pay the member a ‘commission’ for investing in that particular vehicle.
Either way, in effect the member accesses their fund prior to age 55. Where this is determined to be the case then unauthorised payment charges may apply.
These uncertainties create an environment in which an approved list of investments holds a certain appeal for many providers.
The arguments against
The flip side to this is that a list could be too prescriptive and limit innovation. One only has to look at the pre A-Day list to appreciate some of the limits that were placed on pension investments, e.g. the inability to acquire an asset from a connected party.
This condition precluded, for instance, a pension arrangement acquiring a commercial property where the member, or anyone connected with the member, had held an interest in the property in the previous three years.
The situation facing advisers and providers
The current legislation is drafted in such a manner that there is a degree of ambiguity in interpreting the legislation, and whilst there is guidance available from HMRC in the form of the Registered Pension Schemes Manual, there is always the possibility that HMRC could come back and state that the legislation has been misinterpreted.
The penalty for doing so is the imposition of a tax in the form of unauthorised payments charges, which in some instances could amount to 70 per cent.
It therefore appears we are stuck between a rock and a hard place; on the one hand, we have the uncertainty of the existing regime, and on the other, the great unknown of what would be allowed under a permitted investment list and how any existing investment that did not meet these criteria would be dealt with going forward.
We would also have to address the issue of who would take responsibility for putting the list together in the first place?
And finally, bearing in mind what I said earlier regarding pension legislation merely being a framework on which to hang a product, it could be argued that in reality many providers operate a ‘permitted investment list’ anyway.
The necessary tools are therefore available to police suitable investments now; the need for the ‘hammer’ is to make sure due diligence is carried out on the particular investment vehicle before allowing it to be held in a pension arrangement.
However, guidance is certainly needed from the FCA as to what is a realistic and appropriate level of due diligence.
Neil MacGillivray is head of technical support unit at James Hay Partnership