The FSA said last week it was concerned that investors are being sold self-invested personal pensions when a personal pension or stakeholder may be equally appropriate and potentially cheaper.
The regulator was also at pains to stress that its controversial RU64 rule remains in place, so advisers recommending a Sipp to a client must be able to provide evidence to show why that contract is at least as suitable as a stakeholder or personal pension.
It seems the FSA does not necessarily see a wider fund choice as a legitimate reason in itself, especially as the self-investment option is still used only by a minority of Sipp holders.
Following the onset of Sipp regulation earlier this year and in view of the fanfare that has surrounded the product, it is perhaps inevitable that Sipps would come under the regulator’s microscope sooner or later.
Sipps used to be a specialist product and their sale restricted to wealthy and more sophisticated investors. Charging structures on the contracts used to reflect this.
But times have changed and many advisers, and indeed investors, now view Sipps simply as a superior form of personal pension. Charges have come down markedly and are in many cases broadly comparable with those on stakeholder and personal pensions.
On Money Marketing TV last week, Hargreaves Lansdown head of pensions research Tom McPhail argued that investors in its Vantage Sipp can access HSBC’s FTSE All Share tracker for 0.3 per cent whereas to access the same fund through an HSBC stakeholder pension would cost 1 per cent. By the same token, Isa investors readily shell out 1.5 per cent for the Virgin FTSE All Share tracker.
McPhail also says investors can access quality, actively managed funds such as Schroder balanced managed for 0.8 per cent, which holds up well against the 1.5 per cent stakeholder charge cap or the old 1 per cent limit.
Cynics will say Hargreaves’ Sipp pulled in £750m of assets in the last tax year, up from £193m the previous year, so it has a vested interest in getting out this message. Of course it does but the figures appear to back McPhail’s argument.
Not everyone agrees with him. Earlier this month, James Hay said it was concerned after its research found that as many as one in eight Sipp sales are sold off the page. It believes that investors might be inappropriately buying into what it calls “diet Sipps” that have low charges and limited functionality.
But is that necessarily a bad thing? Did stakeholder or personal pensions ever generate such investor interest that one in eight sales were off the page?
If the charges are low and the fund choice high, then surely that is what investors have been crying out for? If the industry has finally found a way through Sipps to engage the investor, then can they not be seen as part of the solution to the problem of narrowing the pension gap rather than as the next misselling scandal?
Where that argument would break down is if investors were piling into fully-insured Sipps where they are paying for the additional flexibility of investing in more esoteric assets, such as traded endowment policies or gilts, and then not using this self-investment option.
But investors looking for products offering this level of flexibility are typically savvy enough to know what they are getting into.
Providers such as AJ Bell, and several others, now offer both low-cost and fully-insured Sipps to cater for these different markets. Perhaps the FSA could ensure that providers monitor clients’ trading activity to ensure that those not needing the wider investment powers are moved into lower-cost contracts. Advisers also need to be careful here.
The change in the nature of the Sipp market since A-Day means like-for-like comparisons between different Sipps can be more tricky. This has prompted many disparaging rivals to brand each others Sipps as “diet Sipps”, “Sipp-lite” or even “Sipps in drag”. It has also given rise to the so-called deferred Sipp, which seems to more or less fit with RU64 if the charges are sufficiently low at the start while acting as a cunning ploy from providers to improve persistency rates if the client gets more demanding as their pension pot grows.
Sipps are still a fledgling market and undoubtedly there will be a few problems. Human nature means some people will be put into the wrong contract due to the lure of commission or an easy sale.
But as Sipps become more commoditised and charges come down, it is likely that they will increasingly be seen as another form of personal pension. After all, as little as 10 years ago, open architecture was still seen as a brave new world by many.
James Phillipps is news editor of Money Marketing