Bringing a bit of glamour to the retirement market, self-invested personal pensions (Sipps) used to be seen as the exotic preserve of the wealthy; the pensions’ equivalent of driving a Ferrari or mooring your yacht in Monaco may be going a bit far, but certainly something to mention down the golf club.
Yet they have come a long way since their inception in 1989 and, particularly since A-Day, are increasingly available to more savers looking for a bit more excitement from their retirement fund. The rise of the group or corporate Sipp has opened the door yet further and more businesses are exploring this route as a viable company pension plan.
But while the market may have been blown wide open there is still widespread scepticism about the appropriateness of these vehicles for a broader market, especially when offered to workers outside of director level.
Clive Grimley, partner at Barnett Waddingham, says: “For most people Sipps are too confusing and they are not appropriate. In the main I would say Sipps are not suitable as an employee benefit with a few exceptions such as for boards of directors.”
At the end of last year, the Financial Services Authority (FSA) added further fuel to the Sipps debate, when its thematic review questioned the level of fees levied by Sipps providers, and accused the industry of opacity in charging structures.
In the review, which was published in September, the regulator said: “We observed variable quality in the disclosure and confirmation of charges by firms, in particular on time-cost charges, which in some cases were opaque. For example, some firms provided an hourly rate but did not indicate what the final cost was likely to be.”
The issue here is whether employers are aware of what they are paying for, and ultimately understand whether these charges are really necessary. Considering the low cost and competitive rates associated with group personal pensions (GPPs), which in many cases will offer more than enough fund choice, are savers paying for a scheme they simply don’t need?
Param Basi, technical pensions director at AWD Chase de Vere, says: “Sipps offer good value where the extra functionality is utilised and comes at a reasonable cost. They represent bad value where the extra functionality is not required and a GPP would fulfil the needs of the scheme member. There is a danger that advisers could ignore this basic principle and sell group Sipps that, in reality, deliver very little added value to the specific needs of the employees.”
Historically, group Sipp providers have struggled to compete alongside GPPs since the latter have paid out high levels of commission to advisers. However, the Retail Distribution Review will outlaw this practice and providers will no longer be able to handsomely reward IFAs for recommending these group personal pension plans.
Richard Mattison, business development director at IPS Partnership, says: “At present [group Sipps] cannot [compete] because of the levels of commission paid for GPP business. Following the introduction of the RDR in 2012 the playing field will be levelled and competition will be fair.”
However, conscious of the need to retain a place among the growing choice of retirement options, group Sipp providers have been attempting to remove their reputation for high fees and murky charging structures.
Billy Mackay, marketing director at AJ Bell, is part of a working group engaged in discussions with the FSA about improving transparency in Sipp charging to bring them into line with GPPs and other low cost options.
He says: “This work is all about introducing greater consistency to the way that Sipp charges are explained in literature. The aim is to ensure that advisers and consumers receive information that allows them to make comparisons across the range of products available and ultimately result in informed decisions. This can only be good news for Sipps and pensions in general.”
The initial appeal of Sipps rested largely on the high levels of fund choice; investors could access a large number of options and asset classes and, should they so choose, really go to town in creating an exotic portfolio. However, in recent years the trend seems to have moved away from excessive choice and advisers increasingly recommend that savers keep things simple. Further, there is some doubt as to whether investors are able to devote the necessary time and skill to actively managing their Sipp.
Basi says: “Many GPPs offer a more than adequate range of fund options. However, as long as the added choice from a Sipp comes without undue extra cost, then there is benefit in having a wider choice of funds. There is a risk to this though and that is having too many funds to choose from can result in confusion which may lead to either subsequent inaction or people taking too much risk with their pension investments.”
Sipps providers are again ready to counter criticism over unnecessary choices and the fees associated with them, and claim to be working to tackle these issues. Some providers are charging fees in line with the investor’s desired level of activity; for example AJ Bell’s Sippcentre charges at a level it claims makes less sophisticated investment scenarios more feasible.
Mackay says: “Low cost Sipps can now compete in the corporate space. The key area of development for most Sipps to make it all hang together is facilitating payment of all contributions and allocation of these contributions to the selected investments. To compete against GPPs this must be automatic and online. Most traditional SIPPs allocate the contributions to the Sipp cash account and then require individual investment decisions to allocate for investment.”
Mackay adds that AJ Bell is “looking very closely” at this area since the firm is developing Isa and dealing account options on its platform.
A further challenge for Sipp providers emerged after the Labour government announced the abolition of higher rate tax relief for those earning over £150,000. The new coalition government has so far revealed no plans to reverse the decision and as things stand, the tax efficiency long associated with pension saving is under threat. This should be of particular concern to Sipp providers since the lion’s share of savers are at the top end of the earnings spectrum and, as such, a key target market may have been turned off.
Sipps offer good value where the extra functionality is utilised and comes at a reasonable cost. They represent bad value where the extra functionality is not required and a GPP would fulfil the needs of the scheme member
However, since the group Sipps market is fairly diverse and made up of more than just high earners, it appears to have emerged relatively unscathed.
IPS Partnership’s Mattison says: “The recent tax changes have not made group Sipps less attractive because they are staff arrangements where the majority of members will not be classed as high earners.”
AWD’s Basi agrees and says tax changes in the group market have seen a limited impact, but he notes that increased legislation penalising high earning pensions savers could unsettle group Sipps in the future.
“While there is an impact at the top end, we see group Sipps as providing access to the Sipp functionality for the masses, and so the majority of these will be unaffected by the tax charges on high earners. However, further restrictions on the availability of higher rate tax relief could have more of an impact,” he says.
As noted, increasingly group Sipps are jostling for position alongside alternative workplace savings options. The latest new pretender is the group Isa which is primarily aimed at new employees or lower earners, but has the potential to appeal to the entire workforce.
With Isas so widely understood and already favoured by many savers since they can access their money often instantaneously, this most modern of employee benefits looks set to be a sure fire winner. However, this does not mean the end for the group Sipp since the advent of corporate platform means no one option is selected in isolation. Under the wrap or platform model, a range of benefits can sit alongside each other to reflect the diversity among today’s workforces.
Mackay says: “Moving forward there will still be a market for group Sipps. The continued development of platforms will result in greater use of combined strategies where you will see saving strategies in the corporate world use a combination of Isa and Sipp-type pension products. For some, a group Isa will make sense but for others the pension route may prove more attractive.”
He adds: “There is no reason that one must be used in preference to the other; platforms have the potential to make combinations available to suit. This may not become a mainstream solution tomorrow but I believe it will happen.”
Basi agrees that platforms present group Sipps with an opportunity to compete against the younger, ’trendier’ savings options, but adds: “Niche Sipps will still have their own place in the market and be sold on an individual basis.”
Although the Sipps market has come under fire from the regulator and faced strong competition from alternative savings options, the benefits of these vehicles for the group market should not be forgotten.
Running a group Sipp can actually prove cheaper than a stakeholder or GPP, particularly if savings in salary sacrifice can are used to pay the running costs. Employers can also offer a range of investment options to suit the differing needs of employees. For example senior staff may capitalise on the full range of self Investment options, middle management have access to a limited range of choices, while junior or lower paid staff simply have a default fund.
Andrew Cheseldine, senior consultant at Hewitt, says: “I would argue that every employer running a defined contribution scheme should run a group Sipp alongside it.”
However he adds that no more than 2 to 3 per cent of the working population should go into it, rather it should be used as a means of offering unconventional funds to investment savvy savers.
“Group Sipps could be used for people that want ethical funds, Shariah law funds, or for anyone going for drawdown later in life. These might be a minority but you don’t want the pension fund to be a barrier to accrual; you don’t want someone refusing to join a pension scheme because the choice isn’t there,” Cheseldine says.
Every employer running a defined contribution scheme should run a group Sipp alongside it
In other words, group Sipps free employers from the shackles of an insurance company’s standard pension scheme and potentially makes them more attractive as an employer.
However, advisers are walking a fine line when it comes to discussing Sipps; on the one hand they clearly offer numerous benefits, on the other the FSA is keen to see these aren’t oversold and there is division on whether these vehicles should really be available to all but the highest earners.
Basi says: “I think that more could be done [to explain the benefits of group Sipps to employers], although there must be clear evidence they are appropriate before these are promoted in the workplace. Many employers will continue to decide that a GPP provides adequate choice for their employees where there are extra costs for selection for a Sipp.”
The forthcoming auto-enrolment legislation, which forces employers to offer all qualifying employees access to a pension scheme, might also help highlight groups Sipps’ potential as a viable savings option. Employers who may have hitherto ignored pensions will necessarily have to think about the options which means group Sipps have a whole new audience.
IPS’s Mattison says: “There is an education process that employers will need to go through. The introduction of Nest (National Employment Savings Trust) will force many to sit up and take notice. This will create business opportunities for advisers and providers.”
Of course, group Sipp providers and advisers are not alone in needing to spread the word; the entire pensions industry needs to raise awareness of the benefits of long-term saving via a workplace vehicle.
Mackay says: “The truth is that awareness is not just an issue for Sipps. The understanding of the need to save, and of the benefits and risks is still an issue across most financial services area. It is unfair to say that advisers could do more. We all need to take responsibility to ensure that everything is done to raise awareness.”