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Is Sipp scrutiny shutting out HNW investors?

Tougher rules and capital requirements lead providers to demand a permitted investments list

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It is not as easy as it used to be to hold esoteric, or non-standard, investments in Sipps. A combination of more stringent capital adequacy requirements for Sipp providers, which take effect in September 2016, and a series of three thematic reviews in the past five years has led to Sipp providers being increasingly required to act as investment gatekeepers.

As the Sipp market has become mainstream following pension simplification in 2006, some say the rules on non-standard investments now need to reflect mass market needs, offering greater protection from unsuitable investments such as unscrupulous firms peddling high-risk unregulated schemes.

Given that the audience and the products have evolved, with platforms providing simpler, lower-cost self-select pensions, it seems inevitable that the Sipp market should come under scrutiny. And with tighter regulatory hoops to jump through, it is expected Sipp providers will increase their fees to meet new capital adequacy and on-going due diligence requirements.

Some Sipp providers and advisers say the recent turn of events is frustrating high net worth investors – the original audience for Sipps. 

Rowanmoor head of pensions technical services Robert Graves worries that losing high-net-worth investors from Sipps also means losing a test-bed for innovation that filters down to the mainstream. “Drawdown started in Sipps in 1995 for high-net-worth clients, and now most pensions have drawdown options,” he says.

Liberty Sipp managing director John Fox says: “It’s now almost impossible for Sipp providers to look at non-standard investments. We stopped them in 2013 – it is easier to concentrate on standard investments. But people are stuck to narrow parameters and a lot of providers are crying out for a permitted investment list.”

Curtis Banks managing director Rupert Curtis is not in favour of a permitted investments list because he feels this should be the responsibility of Sipp providers.

“Where it’s all gone wrong is the man in the street putting all their pension fund into non-standard -investments but it’s down to Sipp operators to be alert,” he says.

Suffolk Life head of marketing and proposition Greg Kingston notes that the FCA has said it has no plans to introduce a permitted investments list. 

“If it had wanted to it could have solved some of the problems it sees in the Sipp market but it is going in another direction with the them-atic review and capital ade-quacy requirements,” he says.

London & Colonial head of business and product development Adam Wrench has concerns about the potential for an unlevel playing field. “We don’t want to have a two-tier market where you go into a Sipp for mainstream investments and go into a SSAS [small self-administered scheme] to get around external
controls like capital adequacy requirements and access to esoteric investments.” 

But Investment Sense marketing and relationship manager Phillip Bray says the more bespoke Sipp providers will still allow access to non-standard investments. “If we’re trying to close the door on bogus -unregulated investment in a Sipp, people will just used a SSAS instead. I’ve seen examples of where that’s happened,” he says.

Many of the traditional Sipp providers that offer Sipps and SSAS say anything deemed unsuitable for a Sipp is also inappropriate for a SSAS. This is also the view of Prydis Wealth -director Scott Harrison. “Any decent provider will administer Sipps and SSAS along the same lines so they are subject to the same sort of scrutiny,”
he says.

Harrison considers investments such as overseas property and renewable energy are more deserving of the ‘non-standard’ label than -assets such as loans, which previously caused no problems for Sipp investors. 

“More sophisticated and entrepreneurial clients are now suffering because providers are less comfortable allowing them to invest in the things they could previously hold in their pension,” he says. “It’s frustrating, and their costs have gone up because administration and pension trustee fees have gone up.”

Walker Crips Pensions pensions director David Littlewood points out there is a duty of care and prudence that comes with trusteeship. “What -clients instruct you to do isn’t necessarily what you should do,” he says. “Sometimes that means turning away a client who wants to take more risk than you are prepared to give them. Clients are in control of the -investments but they have to feel they have a degree of trusteeship -behind them.”

MYSIPP head of pensions operations Sue Stokes reckons many of the reasons investors are attracted to Sipps could be undermined if the trend towards more restrictive -investment choices continues. 

She says: “As with all change there is a danger that the baby is being thrown out with the bathwater and that genuine well-informed investors, who want to use and currently enjoy the flexibility offered by a Sipp, are being swept up into the fallout and the safety net of the new rules.”

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