Following the introduction of FSA regulation of Sipps earlier this month, the operator of a self-invested personal pension is the person who has the key responsibilities in respect of the management and administration of the scheme and who will need to be authorised.
But under trust-based schemes, the role of the trustee continues and they are not absolved from responsibility. A Sipp trustee is normally considered to be a bare trustee because Sipp trustees do not generally give investment advice. They are not regulated to do so, as the very nature of a Sipp is that it is directed by the member.
This member direction can quite often conflict with the trustee’s role. A member may sometimes consider the Sipp trustee an annoying nuisance – the only thing standing between him and his hard-earned wealth and the way he uses it. The member may even question why it is necessary to pay fees for a Sipp service.
Examples of potential conflicts are many. They may include the situation where trustees are forced to disinvest to pay benefits in the absence of specific investment instructions from the member or where assets are temporarily illiquid, such as where the client is a director and it is the close period before the company’s results are released.
Alternatively, the assets may be long-term illiquid such as where a property is difficult to sell and where there may be insufficient funds to pay benefits.
Conflicts can also arise where the member is also the tenant of a property owned by the Sipp. In the case of asbestos regulations, for example, the required management plan would normally be the responsibility of the tenant. However, where the tenant is the member, it is often hard to force him to take action where he does not wish to. Contamination is also a major issue for trustees. It is almost impossible to avoid responsibility and very difficult to obtain adequate insurance.
There can be misunderstandings, particularly in respect of rent arrears where the tenant of a commercial premises is also the member. It can be difficult sometimes for the member to appreciate that HMRC requires the pension fund to receive investment income via the payment of a regular commercial rent, even where the tenant is also the member. The member may be struggling to build his business and cannot see that rent payment is a priority, particularly into his own pension fund. After all, it is his pension fund that is suffering and nobody else’s, so what is the problem?
Less common situations I have come across include the member developing the property without the trustees’ knowledge or consent and using the property for a purpose not authorised by the planning authorities (a brothel in one case).
Building costs may exceed the fund value and create a potential personal liability on the trustee (which in one case led to the threatened winding up of the trust company).
To obtain tax relief on savings and investments, the fund must be administered in accordance with the pension scheme trust deed and rules for the benefit of the beneficiaries and operated on a strict arm’s-length commercial basis.
A key point is that the member is not usually the sole beneficiary of the Sipp. The member’s spouse and dependents are normally also scheme beneficiaries and the trustee has a duty to take account of their interests.
There is also the situation where two or more members, each with individual Sipps, combine to purchase a joint investment such as a property and then cannot agree on what to do with it.
Most of the Sipp trustee’s responsibilities arise from trust law which was never intended to cover the concept of a Sipp. Trust law has developed over many years through Parliamentary acts and case law. The basis of trust law is that one group of people (the trustees) hold assets for the benefit of another group of people (the beneficiaries).
When applied to a Sipp, trust law provides the foundation for how a trustee must act in relation to the pension scheme. The trustee has fiduciary duties. This means that the trustee must always act in the best interests of the scheme beneficiaries. The main duties contained in trust law are:
– Acting in the best interests of the scheme beneficiaries.
– Acting impartially.
– Acting in line with the trust deed and rules.
– Acting prudently, responsibly and honestly.
A Sipp must be set up in accordance with pension legislation and satisfy HMRC requirements. A Sipp trustee can be an individual or a corporate entity and, where a Sipp establisher is a big financial institution, then normally a subsidiary company is appointed in the role of sole trustee of the Sipp.
It is difficult to visualise the service provided by the Sipp trustee but should you ever have the opportunity to enter the nerve centre of a Sipp operation, you will be puzzled to see the overwhelming industry created to supply a method of tax-efficient saving for pension members. At its simplest definition, the Sipp is a do-it-yourself tax-efficient vehicle created by Government to encourage people to save for their retirement.
For trustees and operators, Sipps are challenging and complicated to administer because the member has broad flexibility and control but must keep within HMRC boundaries to maximise tax-efficiency. This flexibility can distort the Sipp operation, creating a convoluted infrastructure in order to provide good levels of service at minimum risk.
There are many parties involved but the role of the trustee must not be underestimated. Legislation has given everyone control and with this control comes considerable responsibility and the potential for conflict.