Changes to self invested pensions in the last 30 years'

The publication of this blog coincides with the 30th anniversary of Martin Tilley's (Director of Technical Services) commencement of employment with Dentons, the Self Invested Pension provider. 

Here he writes of the changes he has seen over those three decades:

It strikes me, that in that time since I joined; self-invested pensions have grown in popularity beyond the expectations of their makers, blossoming like a fertile garden in spring. However, as with any garden left unchecked and unmaintained, it will become overgrown, full of weeds and eventually lose its beauty. 

My fear is that with the raft of complaints with the Ombudsmen, group actions, court cases and publicity that surrounds them, the brand of truly self-invested pensions may have become tarnished beyond repair.

In May of 1988, aside of one or two self-invested retirement annuities, the only form of self-investment permitted was through Small Self-Administered Schemes (SSASs). SSASs were conceived for the entrepreneurial, sophisticated directors of private companies, not the masses. Self Invested Personal Pensions (SIPPs) were probably not even a twinkle in the eye of the then, Chancellor Nigel Lawson. It was on budget day the following year that he stated “I propose to make it easier for people in personal pension schemes to manage their own investments” and from that moment SIPPs were conceived. Whether they were intended solely for the same audience as SSASs is a point of contention.

It is fair to say SIPPs were “some time” in the “gestation period, the first SIPP not being “born” until the following year, in part due to the delay in the release of guidance for the new product. This arrived in October 1989 in the guise of Joint Office Memorandum 101, a document released by the Inland Revenue. 

For around 10 years, this simple document, amounting to three pages, set out the guidance on investments allowable in a SIPP and remained the bible to which SIPP operators referred until the introduction of the ‘Personal Pension Schemes (Restriction on Discretion to Approve) Permitted Investments regulations (SI 117/2001).

This instrument introduced the permitted investment list: a simple schedule consisting of 14 categories, which held firm until the pension simplification era, began in 2006. The change to registered rather than discretionary approval of schemes effectively introduced the acceptability of any asset whatsoever albeit with some attracting unpalatable tax charges. 

It was not until 2007 that the FSA first regulated SIPP directly. This was also the point where the market widened and the massive growth in SIPP operators began. Sadly, with many new providers craving market share, one way to stand out and to obtain critical mass was to accept assets that other SIPP operators may not. Looking only to avoid assets triggering tax charges, it seems that “anything goes was the mantra for many. 

The FCA, have through three subsequent thematic reviews now clarified and expanded upon their principles based handbook and the due diligence and asset acceptance processes of any SIPP operator that is to have a future will have evolved enormously. 

However, let us be clear, the FCA still do not make the investment rules. It cannot judge what a “permitted” investment is. This is still covered by the 2004 Finance Act as amended which still permits “any” asset to be held. 

What the FCA do regulate are the actions of the SIPP operators and their conduct. 

So are legislation and regulation responsible for the raft of toxic assets held in many of the SIPP books now? I would have to say partly yes, or certainly the interpretation of them.  

However, there are two more major contributors to current crisis. The increase in the numbers of scammers and their use of the increase in technology. 

From the widely purchasable phone lists, allowing the cold calling to the more widespread and available use of the internet to promote the investments, the ability to contact potential victims and even for these victims to find such investments of their accord has become so much easier. 

Unfortunately, there is little to prevent the publication of these adverts and the often-misleading information they contain. Claiming an investment is “asset backed” whilst if even true, is of little comfort if the investor has massively overpaid for that asset on day one. Similarly, badging an asset as “SIPP approved” based upon the acceptance of it by one SIPP provider who may have had a less than diligent approach to asset acceptance should be no gauge of credibility.  

The final contributory factor and is must be stated, is the naivety of the investor. Far from their originally intended use by the experienced and sophisticated investor, SIPPs are now used by the masses, many of whom will not understand the structure or features of the investments they have instruct their SIPP providers to hold. 

Perhaps the current and future court cases expected this year will determine what role if any caveat emptor should have played in those instructions.