A group of industry heavyweights recently got together to debate the future of the SIPP market. In the first of a three-part special in Professional Adviser, the team discussed the definition of a SIPP and asked: Is demand for the products set to grow?
Self invested personal pensions (SIPP) have gained a lot of attention recently. Their market growth seems to continue apace despite increasing regulatory involvement about the riskier aspects of the products.
So when a group of industry experts gathered together for a roundtable, hosted by IRESS and Professional Adviser and sponsored by GBST, to debate the future of SIPPs, the aim was to delve beyond the hype and identify their real value.
What is a SIPP?
Kicking off the debate was the controversial question of what actually is a SIPP. This was greeted with a general groan from the group who were openly frustrated with the industry’s constant obsession to define the wrapper.
Ray Chinn, head of pensions at LV=, provided some clarity by saying a SIPP is a pension and savings vehicle with tax efficiencies. “The market has begun to create a tiered structure of SIPPs, starting with personal pensions, which many – including myself -would challenge as being a ‘true’ SIPP,” he said.
Chinn then pointed out that another two layers, arguably exist, mid-tier platform-based SIPPs, with greater flexibility of investment choice and the more traditional bespoke SIPPs which can support more esotericinvestments.
Ultimately, he said the industry’s definition is less important, it is the client’s view that counts and he or she views it as a means of saving for retirement, with a range of features and flexibility depending on what their needs are.
Dennis Hall from Yellowtail Financial Planning agreed, saying he does not get hung up on the definition of a SIPP. His clients simply want a savings vehicle.
“Most clients just like the idea that it is self-invested and they are not forced down a restricted list of funds by a particular pension provider. They want a degree of choice and more transparency on charges from a trusted brand.”
An interesting challenge was then put forward by Billy Mackay from AJ Bell: The real question should be why the industry is obsessed with defining a SIPP?
In his opinion this has been led by a concern, rightly or wrongly, that many personal pensions’ structures are being dressed up to look like SIPPs as the disclosure rules for SIPPs are less stringent.
Kirsty Worgan, head of business development at GBST, responded by saying the key, surely, is to keep all disclosure, reporting and illustrations the same for all products.
This was met with a strong reaction from Mackay, who said while comparability should be encouraged, when you are investing in assets common across mainstream products, to have to produce a key features illustration for areas such as property is madness.
Tom McPhail of Hargreaves Lansdown echoed this: “There is a real problem with trying to force comparability where it just doesn’t fit. We can do more with transparency but I am mindful that most clients don’t want too much transparency and there is an unhealthy preoccupation for overloading SIPPs with obsessive transparency just for the sake of it.”
Hall cautioned that while many consumers may not always want or need transparency, advisers did.
He was supported by Sesame’s Rory Gravatt: “One of the biggest challenges advisers have is the comparability between products. Yet advisers are expected to be able to present a file that shows they have done appropriate research. It’s made worse as TERs and such like often are not accurate.”
Paul Boston of Novia used the MPs expenses scandal to argue his case. He pointed out that while consumers may not want the nth degree of transparency, public scandals such as MP’s expenses have meant people want sufficient information to judge that there are no ‘back-handers’ going on and we have to provide that level of clarity to ensure public confidence.
Consumers want to understand any conflicts of interest, which is vital while products continue with practices such as guided architectures to lead consumers to funds that pay the highest rebates.
McPhail then returned to the issue of defining a SIPP. He added that pressure was now coming from traditional SIPP providers who have been in the business of providing more complex, bespoke products.
“Many of these providers are less than wholly comfortable with the SIPP brand being tarnished by the new low cost/mass market SIPPs. There is a slight element of Monty Python’s ‘People’s front of Judea’ (who spent more time fighting each other) with claims of ‘Our SIPP is better than yours… Don’t call yourself a SIPP…you’re not a true SIPP’.”
Tim Saxton from SIPP provider Barnett Waddingham accepted McPhail’s point but said things were changing.
“Barnett Waddingham is a traditional, bespoke SIPP provider and while we may have felt slightly superior to mass market SIPPs in the past, those days have gone,” he assured the forum.
“Customers drive propositions and there is clear demand from them for the mass market SIPPs as well as the specialist providers. The divide is closing which means a higher level of healthy competition between all SIPP providers.”
Meeting the demand
The discussion then moved on to the important issue of market demand for SIPPs.
Chinn kicked off by saying there is a need for the public to save for retirement so there should be a healthy demand for saving vehicles and that SIPPs are an increasingly popular saving vehicle for many. He said he expects demand to continue to grow.
He is concerned, however, that the public perception around SIPPs is not good because, as with pensions, SIPPs are often associated with poor disclosure of charges, high risk investments and rip-off Britain.
He added this may lead in the short term to a restriction in appetite for pension saving and potentially a generation of retirement paupers. However, he said future generations will see the effects of not saving and realise the bad effect of not planning for retirement which should fuel future demand.
Gravatt put forward the point that demand is also constrained by a lack of adviser understanding of the benefits and often compliance concerns with regard to the suitability of selling SIPPs. “If an adviser has been beaten up on pensions switching or SIPPs they will flinch about using these products again,” he said.
He added: “An adviser can be led by the media-hype that SIPPS are risky and expensive and may not wish to take the risk of censure. The reputation of SIPPs is also often damaged as the wrong investments may have been put into a SIPP.
It is not an issue with the SIPP wrapper itself, a poor investment would have been wrong if placed in a personal pension, but it is labelled in management information reports as a SIPP issue. In such circumstances it is easy to see how advisers and networks get scared of recommending SIPPs.”
Worgan pointed out that the word SIPP should be associated with the wrapper but is becoming linked to the investments and is getting the blame for the problems that exist with these investments. “It is the investment side where the confusion exists, where people don’t understand the TERs, not the wrapper. As an industry we have confused ‘Joe Public’.”
Mackay responded by saying advisers that regularly sell SIPPs are comfortable with the process and in the end, any SIPP suitability analysis is no more complex than if you were using a platform.
McPhail said he was puzzled as to why the whole personal pension market is still there.
“If you started in a world of SIPPs, with NEST looking after the mass market and someone decided to launch a personal pension people would say ‘What is the point of that then?’ However, we started in a world of personal pensions and we are moving to the world of SIPPs so it is natural that people are now questioning the role of personal pensions.”
Hall also remained firm in his belief in the value and demand for SIPPs and said every single client we have that has a pension needs has a SIPP. “For each one we have looked at the options individually and every time a SIPP has come up as the cheaper more flexible, more appropriate option. Compliance reporting that restricts this is not helpful to the consumer.”
McPhail added a consumer view: “There is a continuing negative perception of pensions in the market and some inherent resistance from consumers to engage in pensions.
Specifically on SIPPs we do not see a problem at all. SIPPs work because they are a good product. Essentially the consumer is buying the equivalent of an ISA but in the pension space. I am entirely comfortable with the future of SIPPs.”
Hot SIPPs
The discussion then moved on to which types of SIPPs represented the biggest growth area. Chinn said the area of growth at the moment is the platform-based SIPPs. He said demand for bespoke SIPPs is slowing but mid-tier SIPPs offer the flexibility consumers need, along with the accessibility and the information on the performance that is required and expected in today’s world.
Saxton echoed this: “We have seen growth in the bespoke SIPPs slow from the surge of a few years ago but there are still substantial funds in this sector and further opportunities for growth. However, it is true that the mid-tier, more commoditised SIPPs are where the big growth is currently and we are exploring this market further.”
Boston of Novia, which is positioned in this mid-tier sector, agreed with the group’s assessment: “We have seen huge traction for SIPPs. We do not differentiate in charges on our platform between ISA, SIPP or GIA in terms of wrap charges – it is just a vehicle to deliver money for a post-work lifestyle.
“So there is no fixed cost whatsoever – it is all based on assets. The market is huge – the amount of money sitting in traditional insurance funds, in mirrored funds, in with profits and not performing is vast, but a SIPP gives you access to an incredibly wide range of funds. The biggest growth we now see is the use of discretionary managers.”