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Looking under the bonnet of the Sipp market

A detailed look at the how the Sipp market is evolving as legal and regulatory pressures mount  

A glance at the Sipp market suggests it is under commercial pressure, as legal battles over how much liability providers should have for the failure of clients’ investments drag on.

But it is not all doom and gloom, as a survey of the sector conducted by Money Marketing shows Sipp providers are addressing longstanding areas of concern including unregulated investments.

Providers that are still accepting unregulated investments have been reducing their exposure to them over the past three years.

This is relevant to two ongoing legal cases that ask how much liability Sipp providers should have for the failure of dubious investments.

In March, the High Court heard a case involving Carey Pensions, which set up a Sipp for a client who invested £50,000 into the Store First rental scheme. Its lawyers claimed the company did not break conduct of business rules.

A decision in this case is expected in the summer. Meanwhile, the FCA has also submitted evidence to a judicial review into a Financial Ombudsman Service decision against Berkeley Burke Sipp Administration set for October. A ruling against either Sipp provider in these cases will present a golden opportunity for claims management companies to come in and make the future of these firms very uncertain.

FSCS tells Sipp misselling victims they don’t need a claims manager

These providers might experience the same fate as Lifetime Sipp Company, which collapsed in March and has links to infamous unregulated investment scheme Harlequin.

Although some providers are under genuine pressure, this is not shared across the industry as a whole

According to Lifetime’s administrators, compensation claims have been valued at nearly £56m and are spread across 2,800 Sipp clients, with potentially more in the pipeline.

These two cases and the level of compensation claims against Lifetime prompted Money Marketing to survey 48 Sipp providers. A total of 21 replied and their answers shed some light on how the market is doing against the backdrop of the legal and commercial pressures some are facing.

The survey asked all respondents if they allow unregulated investments, what percentage of assets under management these represent and if their exposure to them has increased, decreased or stayed the same during the past three years.

It also asked what systems providers have in place to monitor unregulated investments, how unregulated investments are categorised and what percentage of transfers from defined benefit schemes into Sipps have gone into unregulated investments.

The lay of the land

Although some providers are under genuine pressure, it is important to realise this is not shared across the industry as a whole. The survey shows there are clear distinctions between providers when it to comes to non-standard assets and unregulated investments.

For example, some providers do not accept any non-standard assets and unregulated investments. These include Royal London, Intelligent Money, Hargreaves Lansdown, InvestAcc, Talbot and Muir, James Hay and DP Pensions.

Some providers have a tiny portion of their assets under management that are unregulated – LV, for example, has just 0.04 per cent in its Sipp – and many are historic investments. As a general rule, LV does not accept non-standard investments and the only ones it allows are fixed-term bank deposits where the term exceeds 30 days.

The vast majority of providers who accept unregulated investments have reduced their exposure to them over the past three years. Unregulated investments usually account for 1 to 5 per cent of total assets under management.

Adviser view: Sam Whybrow

It does not surprise me that Sipp providers have reduced exposure to esoteric investments. HMRC has been trying to increase its tax take from the pension freedoms and needs to balance the books generally. The Sipp providers our firm works with have always been very cautious in their investment approach. It is a bit concerning some of the smaller providers have not given as much information in the survey about their due diligence process compared to the larger providers.

On setting up Sipps from DB transfers, I worry we might have a new pensions review if a raft of potential litigation materialises in a few years. Hopefully the pension transfers that have gone through [those recorded in the survey] have been rigorously checked.

Sam Whybrow is a chartered financial planner at Cervello FP

Walker Crips Pensions’ Ebor Classic Sipp does not accept non-standard assets, but its Ebor Thoroughbred Sipp does, with a total 12 per cent of assets under management in unregulated investments.

The only provider that has increased exposure to unregulated investments over the past three years is Dentons Pensions Management. Almost 22 per cent of its assets under management are now in unregulated investments.

The reason for this jump is the firm’s acquisition of Sippchoice in February 2018, which had many unregulated investments on its balance sheet.

Dentons director of technical services Martin Tilley says advisers should be careful when they assess the headline numbers providers give them regarding non-standard assets and unregulated investments.

He argues it is important that advisers and regulators look beneath the headline figures so they can understand what a Sipp provider means by a “non-standard” or “unregulated” investment.

Tilley adds that the categorisation of these terms can vary by provider. When asked to categorise unregulated investments, a number of providers – including Barnett Waddingham, JLT and Xafinity – give a similar range of products.

These include unlisted shares, unregulated collective investment schemes and some property or land loans. Barnett Waddingham provided an extensive list of what non-standard assets it does not allow, including residential property, carbon credits and rooms in non-UK hotel developments among others.

Monitoring systems

Clearly, advisers may want to see what Sipp providers list in terms of permitted unregulated investments and non-standard assets. But from the FCA’s perspective, the way providers monitor assets is also one of the most critical things.

The FCA is an interested party in both the Carey Pensions and Berkeley Burke cases where it has submitted detailed evidence about the responsibilities of providers who accept esoteric investments.

It has set clear red lines against Sipp providers in the judicial review, and the answers some respondents have shared about their due diligence process in Money Marketing’s survey are worth noting given the FCA’s toughening stance.

From the FCA’s perspective, the way providers monitor assets is critical

Some providers do not seem to scrutinise unregulated investments as much, while others – generally larger firms – have more robust processes in place.

JLT has £1bn of assets under management and its average Sipp value is £449,000. Its monitoring of unregulated investments is formidable when compared with some of the smaller providers in the survey.

JLT does not accept unregulated investments via unregulated introducers and clients must be advised by an authorised financial adviser, unless they are “sophisticated investors” working for a regulated investment firm. More specifically, JLT insists unlisted share purchases have an independent valuation of the firm and does not allow investment in start-up companies or businesses unable to provide accounts for the past three years.

It adds that all members must confirm they have a full understanding of any investment they have sourced, as well as outlining why they feel it is a suitable investment for their Sipp.

Such robust vetting of unregulated investments is probably most important for providers that accept a lot of business from clients transferring out of DB schemes to Sipps.

This is because the political noise being made by the influential work and pensions select committee on British Steel has been getting closer to Sipp providers. At the end of May, a letter from committee chairman and MP Frank Field to the FCA’s supervision director Megan Butler raised concerns about the role of Sipps in relation to DB transfers during the British Steel saga.

It said it has become clear that Sipps are the primary vehicle used by unscrupulous advisers to channel individuals’ pension savings into unsuitable investments.

Adviser view: Kerry Nelson

I am pleased the unregulated figures have been coming down because I have been trying to help clients get compensation for being poorly advised into unregulated products. We are still seeing these solutions unravel and money has been lost in significant volumes. Such solutions should be banned in their entirety and Sipp providers have to take responsibility for some of the access to these unregulated solutions.

I am a massive Sipp fan, but in their purest form, are they helping clients meet their retirement needs? Unless the client is using the full benefits of a bespoke Sipp to purchase property, for example, the extra layer of cost and administration is unnecessary.

Kerry Nelson is managing director at Nexus Independent Financial Advisers 

Money Marketing’s survey does not put a definitive number on how much business Sipp providers have taken on from transfers out of DB schemes over the last 12 months. However, some providers’ responses are interesting when considered in the wider context of what happened with British Steel and the spotlight MPs have shone on the issue.

Table 1 shows the number of plans set up in the past year and how many were from DB transfers. Xafinity, for example, set up 420 new Sipps in the past 12 months, and 163 came from transfers – 39 per cent – while just 1 per cent of Intelligent Money’s 2,000 new Sipps were from transfers.

Our results suggest it is the larger providers that have been making the most of transfers out of DB schemes. This is probably best explained by their size, which allows them to devote time and resources to the matter.

Money Marketing’s survey shows many providers have reduced their exposure to unregulated investments over the past three years, which could be seen as a good thing as the Carey Pensions and Berkeley Burke cases wind their way through the courts.

What is not so reassuring is that the quality of supervision varies among providers, with some being very thorough and others less so. It appears some providers have the resources to police unregulated investments while others are more hamstrung.

Smaller Sipp providers cannot be blamed for their lack of resources but claims management companies will not take such circumstances into consideration if they are looking for firms to launch legal action against.

It has been suggested all Sipp providers should do everything in their power to ensure their procedures and systems are strong enough to withstand the scrutiny of regulators, investors and claims management companies. It is unlikely any of them will take pity on a Sipp provider experiencing difficulty due to the failure of unregulated investments.

Expert view: Rachel Vahey

Three decades of change in pension scheme design

The design of pension schemes has changed beyond almost all recognition in the past three decades. Since the introduction of personal pensions almost 30 years ago, we have witnessed a seismic shift from occupational employer-led schemes to the blossoming of the retail sector and the ability of the individual to control their own retirement destiny.

A key part of that story is the rise of the Sipp. When it initially appeared around 1989, its key advantage was to offer individuals a wider range of investment choices than – typical then – life company-managed investment funds. But as well as other wider asset options, it offered members other attractions such as the ability to hold commercial property within the pension fund. It was soon recognised, alongside SSAS, as a key way for business owners to use their pension savings to boost and support their business finances.

In recent years, the role of Sipps has changed. The simplification changes in 2006 introduced the option for exotic investments, such as wine, art and residential property, but the government backed away from this at the last minute and imposed heavy tax penalties if they were used.

We have witnessed a seismic shift from occupational employer-led schemes to the blossoming of the retail sector

The rise of Sipps is undeniable – most platforms and providers offer people the option of investing in a Sipp, extending from the accumulation stage into retirement through drawdown. The straightforward personal pension or stakeholder is fast dying out.

Most Sipps are now a “Sipp Lite”. The key advantage of the individual controlling the investments remains, as it should, centre stage. Modern Sipps give their members the option of investing in thousands of different options – a world away from the 10 life company funds offered only 20 years ago. But while Sipps used to be synonymous with high charges, this investment freedom now comes at a competitive price, where people need only pay for the investment flexibility they use.

Rachel Vahey is product technical manager at Nucleus Financial

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  1. Good headline………….. just like a modern day motor car the real workings are hidden by many pretty covers

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