Better Business: SIPPs Room 101

All 50,000 pages of current pension legislation would be the first item into SIPPs Room 101, Suffolk Life marketing director John Moret says...

October saw the 20th anniversary of the ffective birth of Self Investment Personal Pensions (SIPPs).

It was in October 1989 that the SFO (Superannuation Funds Office, now part of HMRC) published the first guidance on SIPPs, following their launch in Nigel Lawson's 1989 budget.

Memorandum 101 set out the broad taxation framework for SIPPs and the investments that would be allowed. Although there was little detail in the memorandum, it remained the only real legislative guidance on SIPPs for more than 10 years.

It was a great example of what pension simplification could have achieved. The permitted investments were covered in just 80 words in one short paragraph, and the whole regime was effectively detailed in just two and half pages. Contrast that with the recent anti-forestalling legislation, which runs to more than a hundred pages.

Complex legislation

The legislative complexity really started in 2001 when the Inland Revenue changed the approval regime for SIPPs. Until then, the Revenue had discretion to approve specific investments.

This had its advantages but was incredibly time- consuming. Consequently, it changed to a structure where they no longer had any discretion over the investments within a SIPP; there was a new agreed list of investments, and providers had to ensure that they complied with it.

Then, in 2006, pensions simplification arrived. Today the rules on SIPPs are set out in pages and pages of the Registered Pensions Scheme Manual, and the rules on taxable property alone are incredibly complex. That was the start of the paper mountain, which continues to grow at an alarming rate.

FSA in the framework

And, of course, the operation of SIPPs is now regulated by the FSA, which adds a further layer of legislation. The regulatory framework for the operation of SIPPs was introduced at haste just over two years ago, the catalyst being the proposal of residential property being a permitted asset.

Before April 2007 the regulation of SIPP providers was erratic and inconsistent, and depended largely on the status of the provider. There was a lack of clarity over the level of investor protection provided and the compensation arrangements that applied.

Up to 2007 SIPPs had operated in a twilight regulatory world, with all sorts of anomalies in the interpretation of grey areas such as client money regulations, stock and cash reconciliation requirements, capital requirements and compensation arrangements.

The new regulatory framework has resolved some of these issues, but largely as a result of the different legal structures for SIPPs the capital requirements that SIPP operators need to satisfy vary. There are also differences in the compensation arrangements that apply. More recently questions have also been raised about the protection offered in the event that the operator or administrator is unable to continue in that capacity.

The early regime may not have been perfect, but during the time that Memorandum 101 was in force about 75,000 SIPPs were established without any major problems or scandals. Trade surveys suggest there are now more than half a million SIPPs, with total assets now climbing towards £70bn. It is a remarkable and continuing success story, not least because until about five years ago most life companies gave SIPPs the cold shoulder, preferring to promote the more restrictive and often more expensive traditional personal pension.

It was against this background that I rather flippantly suggested recently that perhaps we should have a SIPP version of Room 101, the BBC comedy TV series based on the radio series of the same name, in which celebrities are invited to discuss their pet hates and persuade the host to consign them to a fate worse than death in Room 101 (the torture room in the novel Nineteen Eighty-Four by George Orwell.)

Suggestions for the chop

If I was to be invited onto the SIPP Room 101, I would simply offer one item: the whole pensions legislation that has been estimated to exceed 50,000 pages.

If that was not allowed, then thinking specifically about SIPPs my suggestions for Room 101 would be:

• Anti-forestalling legislation;
• Compulsory annuitisation, including Alternatively Secured Pensions (ASP);
• Taxable property legislation

We invited advisers to nominate their selections for Room 101. We had a range of suggestions. Many of the responses were in similar vein and there were probably two main themes to emerge, which are summarised in the two quotations from advisers in the box (left).

We had a number of other suggestions, such as the stakeholder charging cap, retention of RU64, complex NI rules particularly for women, annuity compulsion, and even the FSA!

What is clear is the huge dissatisfaction that exists with the current regime. As one adviser suggested we need to influence teenagers and younger job starters using new methods and media - and doing away with the word 'pension' would be a good start.

So, Memorandum 101 may well have been consigned to Room 101. But its attributes of simplicity, constancy (at least for 12 years) and clarity are an indication of what is required if we are to reform the legislative approach to retirement savings.

I hope the door to Room 101 remains open long enough to receive all 700 pieces of existing legislation - and then we can throw away the key!