Bringing Sipps into the regulatory regime has implications for intermediaries, in particular the need to ensure that advice on Sipps meets the FSA’s standards.
We recently carried out some preliminary work examining Sipp advice, as part of a wider review of the retirement planning advice market following pension tax simplification in April 2006.
Based on this initial review, the regime appears to have bedded in but our work identified a number of potential high-level concerns with the way some firms are providing advice on Sipps.
Our initial review showed that Sipp recommendations may be based on access to a broader range of investment funds than on offer under clients’ existing arrangements rather than the self-selection of actual investment assets that a Sipp provides, such as the purchase of a specific commercial property or running a portfolio of individually selected securities.
There are many stakeholder and personal pension arrangements that also offer access to a large number of funds, whether within or outside of the insurer’s fund range. These types of arrangements could be a more suitable alternative to Sipps, in cases where access to a broad range of investment funds is important but self-selection of particular assets is not required.
Against this background we identified some questions and issues that firms should consider and, where appropriate, review their practices.
Rather than simply disclosing Sipp wrapper charges and the cost of underlying investments, firms should consider how to undertake an assessment of the overall impact of these on the customer’s retirement fund.
The Sipp product disclosure requirements do not require a reduction in yield calculation to demonstrate the possible effect of costs on the overall return but advisers are still required to provide suitable advice.
Therefore, under circumstances where stakeholder or personal pension plans are potential alternatives, firms should consider how to undertake a cost comparison with these types of arrangements to demonstrate suitability of advice.
We are aware that some Sipps can be more cost-effective than stakeholder and personal pensions but, without a meaningful analysis, firms will be unable to demonstrate this.
This issue is even more relevant because we recently decided to retain the requirement known as RU64 whereby a firm must document the reasons why a recommended personal pension plan is at least as suitable as a stakeholder pension scheme.
This also applies to Sipps and it is important that advisers are aware of this. Costs will be a significant factor for pension advice and, where the charges under a Sipp are higher than stakeholder schemes, the adviser must be able to justify the reasons for recommending the Sipp.
Firms may seek to justify higher charges because of the bigger fund choice and greater investment flexi-bility of a Sipp compared with stakeholder and personal pensions. However, greater fund choice, by itself, does not automatically lead to superior investment performance.
Unless the customer is able to self-select investment funds, they will rely on a firm’s ability to research and analyse systematically a range of investment funds on the market.
With some Sipps, the number of potential funds available to the consumer runs into the thousands. To undertake systematic research on this scale is a significant task.
To put it simply, there is the potential that customers may be paying for a Sipp wrapper with features and a level of flexibility that they do not require, which could affect their level of retirement income detrimentally.
This is not to suggest that we want to see more recommendations of stakeholder or conventional personal pension contracts.
This is an issue of suitability which needs to be decided by the adviser on a thorough assessment of each customer’s individual circumstances and needs.
As a follow-up to our initial work in this area, we are starting a thematic project to assess the quality of advice on transfers into Sipps.
The intended outcomes are that consumers are given suitable advice when considering transfers into Sipps and firms consider their obligations in relation to treating customers fairly when designing and marketing Sipps. We expect to be undertaking visits to firms in 2008.
In the meantime, we would encourage advisers to look at the way they give Sipp advice and consider the following questions, and, where appropriate, review their current practices:
- How does your firm undertake meaningful cost comparisons with alternative arrangements?
- What benefits does the consumer get from any extra charges?
- And could the investor achieve his aims with a lower-cost pension arrangement?