The way forward

Retirement Planner editor Helen Morrissey recently chaired an online Conjecture debate on the SIPP market. Advisers were encouraged to put their views to a panel of industry experts on how they feel the SIPP market is developing

Today we will be discussing the growth prospects for the SIPP market. We will kick off our panel discussion with the first question which I will direct to Richard Mattison.

What is the panel’s view on SIPP Light products, more specifically, the process of moving from one of these into a full SIPP?

Richard Mattison: Well I think that the SIPP market is basically divided into two types of product. You get the full SIPP, where all the HMRC allowable investments and retirement options are permitted, and then you get the SIPP Light products which are really fund platform products. I am not sure personally whether they should actually be called SIPPs at all. My personal feeling is that they shouldn’t be called SIPPs and it may well be that over the coming months or in the next year or two, they won’t be.

At the moment, what we have is a process where some of these products have been transferred into full SIPP products. However, when that happens, I think that, particularly following the FSA’s review of pension transfers, it only happens for the right reasons.

In my experience, people don’t set up SIPPs unless they actually genuinely want that investment flexibility, or those retirement and death benefit options. So I don’t personally think there is any great problem.

Christine Hallett: I think there are two distinct products, whether you call the SIPP Light a SIPP or not. We actually have got a start-up ‘SIPP’, but we call it a personal pension. It is all about treating customers fairly; it is all about giving consumers choices appropriate to that client at that particular time. If you only promoted a full SIPP, then arguably you could actually fall foul of that, because a full SIPP is not always appropriate for everyone.

I think you have got to have the flexibility to allow clients to flow with one pension product, if that is their choice, all the way through their different life cycles.

We have had a question come in from the audience directed towards John Moret and it follows on from what you have just said there Christine. We have someone from Worldwide Financial Planning saying they believe all pensions should be SIPPs, and that the cheapest way for the majority is to go via a wrap which can then be converted to a full SIPP once they have reached around £200,000. What do you think of that John?

John Moret: Yes, I agree that is a possible route. I think we can get hung up on semantics and SIPP itself is a misnomer. Most SIPPs aren’t actually self invested in the true sense. So I certainly go along with the idea that essentially we are moving to a situation where all you will effectively have is a choice of investments. I think the sooner we get to a situation where all of those sit under one wrapper the better.

I think the current structure where we have different products which need pension transfer advice if a client wants to move from one to another is tying us up in knots. I would much prefer to move to a situation where we effectively have a tax wrapper round a range of investments with full flexibility to move up and down that investment range as the client’s needs change.

Richard Mattison: It’s a really interesting point actually, because the success of wrap in the UK is hotly debated. Some people just feel it can’t work in this country because of the way the regulations work and the legacy products out there. People have tried it and it has failed and there is this question mark over whether they actually make any money. There is no point running a product which doesn’t make the company any money.

John Moret: I just feel that, at the moment, the regulatory regime is really difficult for people to understand. The sooner we can move towards something which is actually clearer, and removes this blurring of what is, or is not, a personal pension or SIPP, the better it will be for everyone.

Can the panellists outline how the protection offered to SIPP clients compares to that given to those with more traditional personal pensions?

Christine Hallett: Well again, this comes back to the point that John was making in terms of the confusion. There is protection to an extent under the Financial Services Compensation Scheme, for the actual SIPP and the bank account. The investments underlying it have separate protection so it is all a bit piecemeal. Traditional personal pensions obviously come under the compensation scheme, which is different to SIPPs.

So it is difficult to say whether SIPPs provide more or less protection than traditional insured schemes. It is very confusing.

Richard Mattison: I think it is very important for an adviser to understand what kind of product they are recommending. Traditionally I think a lot of advisers have felt reassured by advising or recommending an insurance company product. I would argue, that SIPPs do offer a greater degree of protection.

Firstly, provided it is a trust-based product, the pension scheme itself sits outside of the balance sheet of the provider, which means if the provider goes bust, no creditor can touch any of that pension money. Secondly, the underlying investments of the SIPP all have their own individual level of protection under the Financial Services Compensation scheme. So if one fund or one investment under a SIPP goes down, then the rest of the product will not be affected.

Whereas with an insurance company, if the insurance company goes bust, although you have compensation scheme protection up to 90%, the potential mess that the client could get dragged into just doesn’t bear thinking about. I think a lot of advisers, particularly for the high net worth end of their client bank, may consider a trust based SIPP which offers a higher degree of protection than an insurance company product.

John Moret: It is an extremely confused situation at the moment, which is very dependent on the legal structure of the SIPP. I think any adviser recommending a SIPP needs to be absolutely clear on the legal structure, and should quite obviously also ensure that they have a full understanding of what the compensation arrangements are. It is very important that the investor ideally understands that as well.

Some people say SIPP charges have come down while others say they have remained static or actually risen in some instances. Can the panellists give us a clearer picture as to whether these products are cheaper or more expensive today?

John Moret: If we accept Richard’s suggestion of a two-way split between the full or bespoke SIPP and if you like the SIPP Light type proposition. There is downward pressure on the prices of SIPP light products. Competition is increasing in this area so I think we will see growing pressure on price.

If one looks at bespoke SIPPs, my impression is that certainly over the last couple of years, prices have stabilised and if anything, have maybe reduced slightly. I think the pricing pressures there are rather different, there is competition but I don’t believe in that space price is a key determinant. I think there are a lot of other issues, service etc. that come into play there.

Richard Mattison: I would like to add that I think we have got to be honest with people and say that we run businesses, and a business is there to make money. Each provider charges fees to reflect the amount of work they put into the various areas of the operation that they offer.

The added element I think that we may as well just be straight with here is that traditionally, SIPP providers have been able to make a certain amount of money on the cash deposits that they hold. With base rates being so low now, that income stream isn’t there. One of the first things that might give is the fee structure. People may be forced to increase their fees to reflect the fact that they are not making money on cash deposits at the moment.

If I can just get some feedback, I’ve just stopped the first of our interactive votes. It would be great to get some panel feedback on the responses. The question we asked was “Have you recommended SIPPs to clients in the past?”   Of those people who have responded, 36% said “Yes, many times”, 55% said “A couple of times”, and 9% said “Never”. What do you think of those kind of responses Richard?

Richard Mattison: I think it broadly reflects the range of financial adviser that we have in this country. You get different advisers who specialise in different areas. The fact that so many have said “many times” reflects the fact that the general public love self invested pension schemes. The people that don’t are the regulators and I think that is a great shame.

We have had a question which says there has been an issue with some providers supposedly offering whole of market options. However, on closer inspection, the array of assets that can be held doesn’t come close to being whole of market. What does the panel think about this subject?

Christine Hallett: At the end of the day, you have to say what your product is doing, and who the target audience is so that the advisers themselves are very clear on that. From a product point of view, you can be full SIPP but from a trustee point of view, you have the discretion to make decisions, whether the investment is sensible.

So, I think you have to have control of the monitors in place for the types of investment. If you say you do unquoted shares, which we do, it doesn’t mean that we will do everything that is put in front of us. We have a pre-approval process so there are no surprises. Nobody would set up a SIPP with us on the understanding that we will do unquoted shares unless they have all the boxes ticked. So it is just a way, I think, of how one describes the product proposition and then communicates that to the advisers.

Richard Mattison: Christine is right, and this goes back to what we were saying about charging structures. The more you offer, the harder it is to run your product. It becomes more complicated, which is then reflected in the prices that you charge. So what you will probably find is if somebody has a more restrictive investment range, they are likely to offer a cheaper product. It just depends on what is appropriate for the client.

John Moret: Ultimately it is about risk and reward. Providers are running a business and it is for the provider to decide how much risk they are prepared to take. The most important point, or two most important points I think are firstly, clarity – providers have to be clear what they will and won’t allow. Secondly, the adviser needs to be absolutely sure in recommending the SIPP that will cater not just for the client’s immediate needs but for their potential needs in the future. This isn’t always an easy call.

Great. We have just had a question come in from one of our listeners, and he is looking for a bit of clarification on the legal position of the SIPP trust. Is it that the type of SIPPs offered by the companies in the panel, i.e. full SIPPs offer less or more protection than insurance SIPPs? If so, please explain exactly how?

Richard Mattison: My understanding is that a personal pension, which a SIPP is, is a contract offered by an insurance company. The funds held by that product sit on the insurance company’s balance sheet. So if the insurance company goes bust, the creditors of the company therefore have a claim on all those assets.

However, the Financial Services Compensation Scheme covers the insured product up to 90% of the assets held. Which means only 10% are at risk.

A trust-based product sits outside of the company’s balance sheet. So if the company goes bust, there is no claim on that trust whatsoever, and therefore it is the underlying assets of the scheme which are at risk, depending on which investment or asset may be affected by any problems that occur. For example, if you have cash on deposit, and the bank goes bust, each person is covered up to £50,000. If they have unit trusts in their fund, then each individual unit trust is covered by the investor’s Financial Services Compensation Scheme, up to the level which unit trusts are covered by. But it is each individual underlying asset which is therefore affected, which means if one goes down, the others don’t.

With changes to pension legislation on A-Day, especially changes to contribution limits, the argument regarding ISAs versus SIPPs became more complicated. What are your views?

Richard Mattison: I think they both have an important place. Obviously an ISA is a long-term savings plan with tax advantages but it is taxed in a different way. You pull it out tax free but you pay tax on the way in, the range of allowable investments is very different, the amount that you can put in is much lower. Most people, or advisers that I talk to, use both. Also, you can pull your money out of an ISA whenever you want, rather than having to wait until retirement age.

John Moret: I think younger people need to start with ISAs, unless they are in employment and their employer is making a contribution. Otherwise I would say ISA all the time. Let’s face it, with the limits today, there probably aren’t too many young people who can afford to go above the ISA limit. I think SIPPs come into their own as people move through life, and are in a position where they can actually start saving more seriously.

Great. Christine, if I can just get your comments on the results of our latest listener vote. The question that we asked is “What is your view of the current SIPP market?” Of those who responded, 22% said “Very good, there are plenty of attractive solutions”. 67% said “Okay, although improvements could be made”, and 11% said “Very poor, it is rarely the best solution for clients”. What do you think of those results?

Christine Hallett: Actually I am quite surprised. I did think that ‘Very good’ would come out a bit higher than it has. The mood I am experiencing out there is that more advisers are actually beginning to understand the wider opportunities and flexibility of the SIPP framework. I think it reflects the confusion that we have all spoken of between when a SIPP really is a SIPP and the personal pension model.

If we start the next question which I will put to John, what does the future hold for SIPPs in your opinion? Do you think the industry is likely to be web- or paper-based in the future?

John Moret: If we deal with the second point. Technology is going to become more important.

Quite clearly at the top end of the SIPP market there are certain types of investment where technology doesn’t really add a lot. That is not to say there aren’t some parts of the process that could be more automated. I think this is really where the Light type products come into their own and this is where I think platforms will have a growing presence.

Richard Mattison: The SIPP industry can only become web-based at the same speed that all the investment asset classes that it deals with become web-based. One example would be something like hedge funds where to invest in a hedge fund usually involves a great big, long application form. So how can you make that web-based unless the hedge fund provider gives itself an online application process. Until that happens, it will remain paper based.

John Moret: I do think if one looks at what I would call the core type investments, which are unit trusts, and even discretionary management, I think there is progress being made in terms of technology with links to investment managers. So that has to be the future, because that is the way to get costs to come down. Equally from the adviser and client perspective, it is actually making their life a whole lot easier so it has to be the future.

How do you see SIPPs evolving in the context of the wider at-retirement market?

John Moret: I think the SIPP market is still heavily reliant on transfer business. A lot of that transfer business comes close to retirement or at-retirement. I think this is a huge market opportunity for advisers as it is a complex area where most individuals do need advice. I think if you look at the options that are already in the market place, through annuity, to variable annuity, third-way annuities, etc, etc, into drawdown and USP, I mean it is a minefield. It is unfortunate because I really feel that it is unhelpful to have this degree of complexity, but I just see that market growing. It has been estimated I think, something like £350 billion of legacy assets in life company pension products. I just see a lot of that money finding its way into SIPPs and particularly as people get close to retirement.

However, it is an area where good quality advice can really make a difference.

With a general election coming up, there is a lot of discussion as to what would happen should we get a new government. Do you think that a new government would materially influence the environment and appetite for SIPPs going forward?

Richard Mattison: Not immediately, no. I just think they have got other things which are higher up the priority list. I think that it is a huge shame that pensions simplification didn’t happen. I think that it is a massive shame that the government continues to attack the pension industry the way they are with things like tax relief on pension contributions for high earners, and all this nonsense about post 75s. I am hoping that a change in government will at least give a fresh set of ears to these issues and that we as an industry can put some pressure on.

Well I think it is John’s turn to provide comment on the last of our interactive online votes. The question was ‘What do you think will happen to the demand for SIPPs?’ 38% said it would grow sharply, 50% said it would remain around current levels, and 13% said it would fall due to competition from other solutions.

John Moret: I am pretty encouraged actually. Taking the view that the glass is half full rather than half empty, 88% of the respondents are saying that things are either going to stay as they are or get better. I think the future over the next five to 10 years looks extremely good.

Richard Mattison is business development director at The IPS Partnership
A Reading University graduate, Mattison has worked in pension administration for over 20 years. In 1993, he joined SIPP and SSAS provider, PAL, which became The IPS Partnership in 2008. He has been a director since 2006.
Mattison’s roles include sales, marketing and product development.

John Moret is director of marketing at Suffolk Life
John is a specialist SIPP provider. A non-practicing actuary he has worked in the pensions industry for nearly 40 years and is often referred to as “Mr SIPP” having spent much of his working life since 1990 promoting the advantages of SIPPs.
He was the inaugural chairman of the SIPP Provider Group – now known as AMPS – and has worked closely with Government and regulators on a range of issues.

Christine Hallett is chief executive officer at Carey Pensions
Christine has spent 30 years in financial services with blue chip companies.
Starting as a clerk in the Midland Bank in 1976, moving to Abbey National in 1978, where she developed her career over 18 years and was promoted to a senior executive. She then moved in July 1996 to take her first directorship with Pointon York as operations director. She changed the shape and re-positioned the company in her 12 years with them, as managing director and CEO. As CEO of Carey Pensions UK, Christine is dedicated to the delivery of quality service through her team approach.