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By Mark Smith (Chief Operating Officer for Mattioli Woods)
Ever since pension simplification back in 2006 we have seen a fundamental shift in the market for Small Self-administered Schemes (SSAS) and Self-invested Personal Pensions (SIPP). Ultimately this has brought us to the position we are in today where, from a regulatory perspective, the two products are seen as very different.
Historically, SSAS’ were provided by ‘pensioneer trustees’ who, as the market began to develop, also looked to provide SIPP arrangements. At the time, these schemes were run broadly in the same way.
However, the Financial Services Authority (now the FCA) was seeing a significant shift of pension scheme assets from regulated personal pensions into unregulated SIPP’s and, as a result of this, legislation brought SIPP’s under the FSA’s personal pension regime and became a regulated product. Over the course of the next decade, we have seen an increasing regulatory burden on SIPP operators.
This includes much more governance around the product itself and, following a number of FCA thematic reviews, last year a significant increase in the capital adequacy requirement for SIPP providers; particularly any who have allowed what the FCA deem to be non-standard investments to be held by their clients in their arrangements.
While it could be argued that a SSAS is also a regulated pension scheme under the remit of The Pensions Regulator, only schemes with more than one member are required to register and the actual detail of the regulation governing occupational pension schemes falls away as long as the members are also trustees of their own pension arrangements.
This has meant that SSAS’ rarely come onto The Pension Regulator’s radar. Indeed, with all of the exemptions in place, it could be argued that there is a real lack of clarity on how SSAS’ are managed.
We are now in a position whereby in order for somebody to provide a SIPP they need to apply to the FCA for approval for their firm to be able to operate personal pensions, with all of the regulatory requirements and capital that come with those authorisations. Additionally, the controllers of that business individually must also be personally authorised by the FCA under the current regime.
Conversely, with very few exceptions for individuals of businesses that might have a poor track record with HM Revenue & Customs, anyone can set themselves up as a SSAS scheme administrator, trustee, or practitioner.
Therefore, we have moved from an environment where SSAS/SIPP operators all needed to be approved in some form – either as a pensioneer trustee or, for SIPP’s, with the backing of an established bank or building society provider pre-pension simplification – there are now two very different regimes, which have ultimately led to some poor market practices.
While the market for non-standard investments into SIPP’s has contracted to a great extent – and only a small number of very specialist providers are now willing to look at this type of business – it is possible for a SSAS to be established and pension assets to be transferred into that arrangement and for there to be very limited controls on the type of assets that can be held.
There are a number of legitimate assets and some very beneficial reasons why a SSAS is an appropriate vehicle for business owners, but it could be said that the vehicle has been abused by some providers as a way in which non-standard investments can be held outside of the SIPP regulatory framework.
While non-standard assets come in various guises, what we do know is that there are a number of investments that have been created to target the retail market. A number of these investments are highly complex, and costly from a structure perspective. More importantly they are also very high risk, including overseas property.
Some can be very difficult to value as they do not have the benefit of any kind of investor protection. The problem is exacerbated by the fact that the investments are quite often promoted by non-regulated parties, and therefore no regulated advice is given on their suitability.
This means there is no recourse for individual pension scheme members to make a claim or complaint against an advisor. So the majority of these investments are not covered by the Financial Services Compensation Scheme, meaning that if the investment itself fails investors do not have protection.
We have seen that as a result of assets being held within SIPP arrangements there are a number of investments which have ultimately fallen back to the Financial Services Compensation Scheme (FSCS) as, while the sale of the investment was not regulated, it was held within a regulated product.
Therefore, in certain circumstances, there has been sufficient grounds for a compensation payment to be paid to a pension scheme’s members.
The position would not be replicated if the same non-standard investment was placed into a SSAS, as this would fall completely outside of FSCS. Therefore, it is highly unlikely that individual members would understand these differences nor be aware of the different regulatory and compensation positions which apply as a result of the type of pension scheme structure that houses those investments.
This has become a regulatory focus for The Pensions Regulator who has been looking at what is happening in the market and has very real concerns on how the SSAS structure has been abused.
It could be said, there are likely to be a number of retail investors who now hold non-standard investments which are particularly high risk, have been miss-sold into those arrangements, and have also established a SSAS structure that they are unlikely to understand. However, they will see very little protection because the investment itself and the SSAS structure sit outside the FCA’s regulatory remit.
There has been press speculation about the potential for SSAS’ to be banned completely, or for transfers to be restricted in some way. However, we do not believe that is the appropriate course of action as SSAS’ which are operated properly with experienced practitioners can be a very powerful planning tool for the right individuals.
It is almost impossible for the FCA to take any action against the operating of a SSAS where non-standard investments have been placed into those arrangements as they sit outside their regulation.
It could be argued that rather than SSAS’ being banned outright, they should only be allowed to be provided by firms that have FCA SIPP operating permissions. This would effectively enable the FCA to have much closer insight into those providers and, as the regulator for the wider business, be able to review all of the working practices and so ensure that all of the authorisation requirements were being met by anybody providing a SSAS.
It would also mean that if only FCA-authorised firms could provide a SSAS, then the senior manager regime which would be implemented across the financial services sector in the coming months and years would also ensure that these firms were captured and real oversight responsibility taken by the individuals in those firms.
It could also be argued that it should not be possible for a firm to be able to set up as either a scheme administrator, scheme practitioner or trustee for a SSAS unless they have those wider permissions. This may then drive much more governance and regulation into this sector and tackle the concerns of The Pensions Regulator that SSAS’ are being abused.
Used properly SSAS’ can be a great pension planning vehicle and one that, for the right individuals, can that deliver real value for their long-term retirement plans.
Although many businesses are financially strong and are achieving healthy profits, they frequently require additional liquidity in order for their business to develop. Those who do meet with their bank manager and manage to hurdle the ever-increasing criteria required to be approved for funding are then faced with interest rates that are better associated with credit cards or payday loan companies, rather than being business or long-term private client-centric.
In some cases, the use of directors’ pension benefits to establish a SSAS could be an option. This type of pension scheme can lend money to a sponsoring employer at a commercial rate.
A SSAS is able to lend half of its value to a sponsoring employer, and with the average age of a director being 58, many may have considerable pension funds which have been built up over the years. If these funds are combined, there could be a substantial amount of money available for lending purposes.
These loans, known as a loanbacks, are useful in assisting the development of a business but are also efficient when a company is already producing healthy profits. A lump sum contribution can be made to the pension scheme and then loaned back to the business in order to retain the cash within the company. This creates a corporation tax saving. It should also be noted that any interest paid to the pension scheme will also reduce profits, creating future corporation tax savings.
The terms of a loanback are relatively straightforward when compared with the reams of small print associated with a high street loan, and set up costs are also not unreasonable. Security is needed to cover the loan. The maximum term of the loan is five years with repayment on a capital and interest basis. Therefore this vehicle should be seen as a short to medium-term funding solution and not an open-ended debt source.
As well as the advantages outlined above, a loanback can provide an excellent return for the pension scheme, certainly over and above what can be provided in cash.
It is important for business owners to know that there are alternative sources of finance available, but appropriate planning is required before considering such a proposal on whether it is suitable for both the business and the pension scheme.
SSAS rarely come onto The Pension Regulator’s radar.
Investors are not protected from non-standard investments placed into a SSAS.
SSAS should only be allowed to be provided by firms that have FCA SIPP operating permissions.