The pensions industry is calling for fundamental reform of how Sipps are regulated as advisers face the prospect of another substantial Financial Services Compensation Scheme interim levy.
Sipp firms believe restricting what investments can be held in Sipps and introducing more flexibility in occu-pational pension schemes could help reduce the burden of claims falling on the lifeboat fund.
Life and pensions advisers were warned last week they may have to stump up an additional levy after the FSCS admitted it has underestimated the “velocity of growth” of Sipp-related claims.
FSCS chief executive Mark Neale has estimated the FSCS is facing a year-end deficit of £28m.
He said: “If that estimate is borne out by claims volumes in the remainder of 2016, we will have to raise a supplementary levy again. And because life and pensions advisers have already paid a levy of £90m this year against an annual limit of £100m, there is the possibility that a supplementary levy will trigger a cross-subsidy.”
An extra levy heaped on advisers has been branded “unfair” given a small number of firms are driving most of the claims.
Money Marketing has sought to find out what can be done to curb the Sipp missellling surge. Has the industry now reached the peak for Sipp claims or is there more fallout to come?
Crunching the numbers
In its interim report, the FSCS shed some light on the extent of Sipp misselling.
The number of Sipp-related claims has increased by 59 per cent this year, with total compensation for 2016/17 estimated at over £136m plus administration costs of £7m.
The lifeboat scheme said it “underestimated” the flood of Sipp claims, which has led to the warning it will most likely have to impose an interim levy on life and pension advisers next year. That warning follows a £20m interim levy for the fee block in March 2015.
In 2014/15 the FSCS paid out £19.4m in compensation on 1,142 Sipp-related claims. That increased to £77m in Sipp-claim compensation in 2015/16.
Since 2014 the FSCS – funded through life and pension advisers’ levies – has paid out £259.4m in compensation related to Sipp claims.
According to the FSCS, despite it receiving claims against 171 firms, just four firms were responsible for 73 per cent of the £136m compensation bill in 2016/17.
Those firms are 1 Stop Financial Management, Tailormade Independent, Total Wealth Management and HD Administrators. In November Money Marketing revealed the FSCS had paid out about £2.8m on 94 claims in connection with collapsed property investment firm Arck, which invested clients’ pensions through HD Administrators.
Up to September the FSCS had upheld 919 claims of unsuitable advice against Tailormade, with compensation of more than £40m paid to date.
The FSCS declared Total Wealth Management in default in May 2015 and 1 Stop Financial Management in July 2014.
Recent Financial Ombudsman Service data also shows an increase in complaints about Sipps. Between July and September the FOS received 435 Sipp enquiries, a slight increase on the 427 it received between April and June. Of the enquiries received it took on 321 new cases and 95 of those were passed to an ombudsman.
The FSCS says Sipp-related claims mostly relate to pension transfer advice. The investments the funds are moved to are usually high-risk, non-standard investments such as overseas property and palm oil plantations.
Suffolk Life communications and insight head Greg Kingston argues the fact that claims stem from bad investment advice rather than being related to the Sipp is an important distinction.
He says: “When I saw the FSCS figures the thing that struck me immediately was it was published as Sipp claims. That is probably misleading and it is frustrating because some of the better-quality providers in the marketplace continue to be tarnished by this.
“These are not Sipp claims – everybody knows what happened with all of these clients. They are really investment claims, the Sipp is a side issue that was set up to allow the sale of these investments.”
The fact that most claims have come from a handful of advisers is also likely to be reflected in provider practice. Kingston says a small number of Sipp providers will be allowing the high-risk assets into their wrappers.
He says: “Most Sipp providers will have an investment committee that will decide what sort of investments they will allow in their Sipps within the parameters of HM Revenue & Customs rules. It is generally accepted that the better end of the market would not allow these investments at all. That is why the suspicion is these investments are concentrated in a small number of providers at the lower end of the market.”
The FSCS has hinted it does not know the scale of future Sipp liabilities. In its half-year outlook it said: “The problem of bad advice about the investment of retirement savings is spread across many more than just four firms and we cannot easily foresee what the eventual volume of claims against these firms will prove to be.”
Altus Consulting senior consultant Jon Dean is hopeful claims have reached their peak and says the high level of consolidation in the Sipp market spells good news for a decline in claims.
He says: “A lot of those smaller players could well have been the ones that did not deal so much in terms of platform assets and, being smaller firms, they are less well resourced to do the due diligence on the underlying investments. The rate of new claims ought to start diminishing.”
However, the low interest rate, low yield environment means investors still have an appetite for riskier products in the hope they can boost returns. Added to this, some commentators believe future Sipp-related claims have yet to be referred to the FOS, which means they are some way off potentially burdening the FSCS.
With many of the issues stemming from transfers, calls have been made for better regulation of occupational pension schemes to introduce more flexibility in line with pension freedoms.
KPMG partner David Fairs says: “With freedom and choice you have got the ability for people to access their pots more flexibly but, unfortunately, a way that freedom and choice has been implemented is there are relatively few occupational schemes that allow flexibility directly from the scheme.”
Fairs argues occupational schemes are put off by the risk and additional cost of allowing people more flexibility, which is leading to people being advised towards Sipps.
He says: “[Sipps] naturally have higher costs because of the flexibility that is inherent. It may be the case that some people with fairly modest savings should actually take a transfer to a personal pension that does not have all of the flexibility around self-invested assets because they want to take advantage of freedom and choice. Some of this is advisers understanding their clients better. Some of it is if something could be done around regulation of occupational pension schemes to offer freedom and choice both economically and with lower risk.”
The Sipp provider is now doing a lot more due diligence and evidencing what they are doing and there are cost implications of that
Dean agrees giving pension trusts more power to deny or question transfers could help to stop investors falling foul of transferring to bad investments.
The Government has launched a consultation on giving pension schemes powers to block transfers if the receiving scheme is not operated by an FCA authorised firm, if the individual does not receive any income from the sponsoring employer of the receiving scheme or if the receiving scheme is not an authorised master trust.
However, Dean notes a High Court decision in February found that a Royal London customer did have a right to transfer pension funds to a SSAS that Royal London suspected of being a scam.
Sipp providers must meet some due diligence requirements imposed by the regulator, and Dentons Pension Management pension technical services director Martin Tilley says this is having a positive impact for the majority of providers.
Tilley says: “A Sipp provider now has responsibility for the assets it accepts in its book. It has to take into account all manner of things as to whether it is happy to take certain asset classes. It can make its own rules about what it will and won’t accept. That is why you have different Sipp providers that will take a different attitude and accept different assets.
“The Sipp provider is now doing a lot more due diligence and eviden-cing what they are doing and there are cost implications of doing that.”
However, Dean says many Sipp claims result from unregulated assets, limiting how effective new rules can be.
He says: “For the unregulated assets, what we are seeing is quite a lot of assets being transferred off-platform. Platforms tend to have processes that do due diligence on assets and they have ultimate power as to whether they will accept an asset onto the platform or not. The sort of schemes the FSCS is talking about in terms of overseas hotel chains and palm oil plantations are not platform assets and they are not regulated. Perhaps consumers are just not understanding that is the case.”
In its half-yearly update, the Financial Services Compensation said the majority of claims in relation to Sipps are about advice to invest in non-standard assets such as hotel rooms in Caribbean holiday resorts, storage pods and plantations of oil producing trees in Asia.
The detail of these investments is telling and gets straight to the heart of the issue. They are investments that have been allowed in a minority of Sipps following advice from a small minority of advisers. Unfortunately the “too good to be true” nature of the investments turned out to be exactly that.
These cases cost the industry both in financial and reputation terms. At a practical level they increase the levy all advisers have to pay when the vast majority would not go anywhere near these kinds of investments.
It is not surprising when we spoke to advisers, a significant majority (78 per cent) were in favour of a risk-based FSCS levy, where those who transact the riskiest business bear the heaviest burden in funding the lifeboat scheme.
This is something already being considered as part of the Financial Advice Market Review and a move to a “polluter pays” system could avoid the industry being penalised by the actions of a small minority. The consultation has been delayed but is due before Christmas.
Another measure that would go a long way to resolving this issue would be to reintroduce a permitted investments list for Sipps. This existed before pensions simplification in 2006. Reinstating it would be a simple way of limiting investments of the kind that lie at the heart of most misselling claims.
It would also have the knock-on benefit of making it harder for pension fraudsters to succeed with scams based around investments that entice people with high returns that rarely materialise.
The FSCS levy is already a heavy burden on advisers. A further increase to pay for the actions of a small minority of investments in obscure schemes feels unfair and should be avoidable.
Gareth James is technical resources head at AJ Bell