Pensions liberation, capital adequacy, permitted investments and new disclosure requirements – these days, the chairman of the Association of Member-directed Pension Schemes has got to keep on top of a lot of fast-developing stories.
For Andrew Roberts, who combines that role with the position of partner at Barnett Waddingham, tackling pensions liberation is arguably at the top of a very busy agenda for the Sipp community.
While regulators and ministers regularly make statements urging the public to beware of pensions liberators, Roberts is frustrated at the way Amps members are left trying to protect clients in a world where perpetrators can change the vehicles they use for pensions liberation with ease.
He says it is a particularly challenging problem for smaller providers as it takes them longer to spot a trend of transfers going to a particular destination.
“Smaller providers can, as a result, find they have already done a second transfer to a pensions liberation scheme before they realise what is going on, by which time the pensions liberator has shut it down and moved on,” he says.
Roberts is critical of the relative ease with which pensions liberators can create structures through which they can wash funds.
“It is so easy to set up a new occupational scheme. The Pensions Regulator could be doing more to support trustees of DB schemes and SSASs. And HM Revenue & Customs could be doing more rigorous tests before authorising new schemes. This is a really tough environment and we really need help from the regulators to stop what is going on,” he says.
Pooling of information is another way the industry can become more responsive to these practices, with providers sharing knowledge and co-ordinating action against pensions liberators.
Roberts points out that pooling of information is already happening to a small extent because of Action Fraud, the UK national fraud reporting centre which has made pensions liberation one of its key campaigns recently. But he would like to see better systems for sharing information on suspect schemes.
Whatever progress the industry might be making in the area of Sipp pensions liberation, however, Roberts reports a trend away from targeting Sipp members and says it is members of defined-benefit schemes that are increasingly in their sights.
“Trustees of these schemes are in a bind because they have a legal obligation to effect the transfer of the funds within a certain time, yet there is a grey area as to whether they should do so if they think the transfer is going into a questionable structure,” says Roberts. This puts trustees in a difficult position, he adds.
“DB trustees have several months to effect the transfer but they are under pressure from the member who may argue they are missing out on investment returns during the period of the delay. So it would be helpful if the regulator could give clarity as to how long a delay is justifiable.”
In addition to pensions liberation, Sipp providers are facing the challenges of the new capital adequacy demands that will require some firms to increase their capital holdings by a factor of 20 or more.
Roberts predicts consolidation among Sipp providers will continue but points out that the investments within providers will prove obstacles to acquisition in some cases. However, he argues, it is no surprise that some providers find themselves hostage to the way they approached investments years ago.
“Back in 2007, the FSA was under pressure to get all existing Sipps authorised so they did not have the time to check the investments in every single one. I hope everyone accepts, if one thinks Sipp operators could have done more, that they were operating within regulations designed for personal pensions and not Sipps. So it is not surprising that more could have been done,” he says.
Roberts sees a number of possible outcomes for small Sipp providers as a result of the capital adequacy pressures that will soon be brought to bear on them.
While some will be bought by bigger providers, for those with questionable investments on their books, there are two possible outcomes: raise the capital and carry on or stagger towards collapse.
“There will be a handful not able to find buyers,” he says. “The main reason a Sipp provider would not want to take them will be because of the investments they hold. For example, take the recent FSA guidance on esoteric investments such as off-plan hotel rooms. If a provider is left with a book of these investments, it might be they all have to be sold. This could take a while, and if you have to exit three years into a five-year plan, it could prove awkward for the client,” he says.
So, could we see some small providers which are unable to operate within the new capital adequacy regime simply throw in the towel?
Roberts points out that no providers want to see their peers failing, even if it means they will pick up the business.
“The Sipp industry is not going to celebrate Sipp providers closing the doors and walking away. There is no victory in tarnishing the name of the Sipp brand,” he says although he accepts this could happen.
But in the event that such closures or forced sales of esoteric assets come to pass, Roberts sees two possible outcomes for advisers of clients stuck with such zombie Sipp providers.
The first and most serious for the adviser is where the regulator thinks the Sipp provider has been set up with an unwritten agreement with an unauthorised collective investment scheme simply for the promotion of that particular Ucis.
“If the adviser said ‘Use company A because it allows you to invest in Ucis B’, the FSA will point to its recent guidance on claims to the financial ombudsman that says you should not just look at the wrapper when recommending a provider,” he says.
The second, less serious situation advisers could find themselves in is where they have invested their client’s money in regulated investments that happen to be with a Sipp provider which closes its doors.
“In cases like this, where the financial adviser and his client get caught in the crossfire, the question the adviser has to answer will be whether they did the due diligence on the Sipp provider or whether they simply went for the one with the lowest fees,” he says.
Given the provider is more than likely to have satisfied the capital adequacy requirements that were in place at the time the asset was purchased, the adviser is likely to be in the clear, he argues.
“These are developing issues and the market responds. A few years ago, there was no thought that there would be such widespread promotion of Ucis, so a Sipp company used three years ago might have been perfectly sound,” he adds.
The issue of permitted investments in Sipps was spiced up recently when the chancellor unveiled a consultation on the ability to convert commercial property into residential in the Budget.
Roberts gives the idea a muted welcome: “There isn’t massive support for it in the pensions industry although the bespoke providers would be accommodating.”
But he could see the consultation bringing welcome clarity. “We already get asked whether commercial property can be developed into residential. Our view is that it can up to a point but where that point is a grey area. So clarification of that would be useful.
“The simplest way to do it would be to say you can convert but the Sipp or the SSAS has to dispose of it when someone moves in. So it would be a case of the definition of residential property becoming property which had someone in it.”
Roberts has been a vocal critic of the FSA’s new Sipp disclosure rules which from this month require all personal pension schemes to produce key features illustrations along with effect-of-charges and reduction-in-yield information.
Roberts has estimated the initial cost to the industry at £2.8m with ongoing costs of £2.7m a year – expenses that ultimately will be paid for by consumers. He says the costs will outweigh the benefits.
What seems to annoy Roberts most is the fact these extra costs will not even put consumers in a position to compare Sipp provider charges effectively.
The new rules require Sipp providers to give different rates of return for different asset classes in their projections. But because the new rules allow each provider to set those rates of return, consumers and their advisers will be unable to judge the total cost of investing for different providers.
“It will be difficult for consumers to make a clear choice about which one is delivering better value. I have no particular issue with Sipp providers having to give illustrations, but it is frustrating when the FSA says this is a cheap thing to implement and then says providers can set their own rates of return,” he says.
He sees a tough but valuable message coming down the line in 2014 when all pension providers will be required to give money projections that take into account the effect of inflation – a change that will see some projections giving negative returns.
“If you think inflation is going to be 2.5 per cent and the investor wants to invest in cash at 1 per cent and the Sipp provider is taking £500 in charges, you are going to end up with a negative return.
“People will start to understand the effect of inflation. This is not a bad message for people to get,” says Roberts.
Asked what he thinks of the idea of transferring investment returns in SSAS arrangements between generations as an inheritance tax mitigation tool, Roberts removes his Amps hat and replaces it with his Barnett Waddingham one.
The structure has been marketed by Axa, which has a counsel’s opinion which supports Axa’s argument that the scheme is permitted, but Roberts is unimpressed.
“We don’t think it is compatible with the legislation. If you have given away income, you have given away some of the asset, simple as that.
“Take gilt strips – the income has value and the asset you get back at redemption has value. So if you give away an asset that has value, we think a tax charge may be payable,” he says.
As to the future, Roberts would like to see further flexibility woven into the income drawdown legislation.
He would like to see the introduction of what he terms enhanced drawdown. This is a hybrid of flexible and capped drawdown that removes the need to buy a secure income, thus enabling an entire pot to retain death benefits.
For example, if an individual had a £600,000 pot, rather than use £300,000 to buy an annuity to give them a secure income of £20,000 for life, they should be allowed to keep a similar sum in capped drawdown and be able to access the remaining £300,000 through flexible drawdown.
“If the capped drawdown part of the money fell to £200,000, say, then yes, there is a slight risk they might end up on the state at some point. But most people who build this sort of money up are not likely to blow the whole lot,” he says.
The history of Sipps has largely been one of increasing flexibility and choice, and further loosening of the drawdown rules would be welcomed by all.
But Roberts worries the direction of travel could soon change, not least because of the work the FSA and Financial Conduct Authority have already engaged in.
“My fear is that Sipps are dumbed down to flexible personal pensions. But I hope that when we get through the current changes we will still have a large group of bespoke Sipp providers because the bespoke Sipp market is really about letting people use their pension money in the way that is best for them.”
Advisers and their clients will doubtless hope Roberts’ fears are not realised and true Sipps continue to do what it says on the tin.