Are SIPPs still working for experienced investors?
28 January 2019
It’s been more than a decade since the rules governing Self Invested Personal Pensions (SIPPs) were relaxed. The flexibility heralded by the 2006 Pensions Reforms was intended to allow investors to take greater control of their pensions.
This opened up the possibility of greater diversification as investors could begin to introduce a range of alternative assets alongside mainstream investment options. The opportunity to spread risk and boost returns by investing in assets such as commercial property, or shares in unquoted companies, was met with a collective cheer from many.
Fast-forward to today, however, and the picture looks rather different.
The freedom promised by the reforms and the reality delivered, as well as the deemed responsibilities of those who administer SIPPs, have shifted over time.
So, what has changed and where does this leave private investors?
To me, this wrapper – though on the face of it aimed squarely at the sophisticated investor market - appears to have developed a distinctly “retail” flavour. By this I mean that investors now have far less choice over what they can actually hold in a SIPP, with “non-standard” investments (i.e. alternative assets) increasingly closed off, thanks to a combination of legal, regulatory and commercial pressures on SIPP providers.
Who’s in control?
One key issue is that of liability. Recent years have seen an exodus of people transferring out of Defined Benefit (DB) pension schemes, and into personal pensions, including SIPPs. With this influx of capital comes greater potential to get it wrong, raising increasing questions about who’s at fault if investments fail or are unsuitable for the SIPP holder.
Debate is raging over whether SIPP providers should be held liable for investment decisions or whether they are simply administrators responsible only for execution, with some high profile legal actions against SIPP providers currently going through the courts. If such claims are successful, the very concept of a self-invested pension could be at an end.
One size doesn’t fit all
On top of this, the Financial Conduct Authority (FCA) has been taking a very hard line on unregulated collective investment schemes. Though it is clearly important to ensure such schemes are not marketed to the general public, many are suitable for sophisticated investors, and as such are technically allowable. They will typically have proper structures around them, and while the schemes themselves may not be specifically FCA-regulated, those that operate them generally will be.
Many of the recent problems have involved advisors recommending such schemes to investors who were totally unsuited to them.
Bad advice is bad advice whether it relates to SIPP investments or otherwise. Unregulated collective investment schemes should not all be tarred with the same brush – which is unfortunately what seems to be happening.
As a result, many SIPP providers are simply deciding to no longer allow non-standard investments. For some, the increased regulatory obligations and the lengthy process and cost involved in having their investment committees evaluate them means it’s easier and pragmatic, from a commercial point of view, to just to say no.
Higher costs are also spurring a push towards volume, triggering consolidation in the industry and making “plain vanilla only” much more attractive as a business model. Many of those providers that will still allow non-standard investments are increasingly charging through the nose for the privilege, making it prohibitively expensive for private investors to go ahead.
Often these changes can happen seemingly overnight, leaving sophisticated investors stuck with expensive-to-run SIPPs that don’t deliver the autonomy they once promised, and unable to change provider without a huge amount of difficulty and cost, at a time when market competition is shrinking.
Where’s the logic?
This does experienced private investors a huge disservice and undermines the very point of SIPPs. From a risk/return perspective, it makes sense to balance a conventional equity/bond portfolio with some exposure to alternatives in order to smooth volatility and target improved longer term performance. After all, institutional investors follow this logic, so why are experienced investors not allowed to do the same with their pension capital in order to maximise returns and create sensible diversification?
It also defies logic that investors are able to buy a commercial property through their SIPP, which is likely to require a high concentration of capital (and therefore risk), but not allow them to invest in property investment vehicles where they can pool resources alongside other investors so that they can diversify their asset holdings.
Regulators and the industry should be championing investors’ right to choice – not stifling it. The importance of creating a diversified portfolio is the fundamental tenet of a successful long-term investment strategy. An allocation to “non-standard” alternative assets should form a vital part. Yet this is becoming less and less possible via SIPPs. Yet I think it is highly important for SIPP providers to be independent of investment product providers – this is the only way to ensure conflicts of interest are managed. Recent scandals in the discretionary fund manager space underline this.
However, such inflexibility and lack of freedom is now a pressing issue for many of our clients, who are finding that it is no longer possible to “self-invest” their SIPP and allocate assets as they see fit to optimise their portfolios. And what is the point of that?
Claire Madden, Managing Partner, January 2019