There has been a marked increase in consumers choosing to purchase alternative investments with their SIPPs over the last three years.

With an average SIPP size of £70 – £80,000 and over 800,000 SIPPs out there (and the number is growing at 20 – 30 percent per annum) this represents a significant new and enticing market for advisers. In this article Dan Kiernan of Intelligent Partnership examines the phenomenon and takes a look at some of the reasons behind the growth of alternatives within SIPPs.

The flow of dreadful macro-economic news since the crash of 2008 has shaken consumers’ faith in traditional stock market based investments and investors are now increasingly considering putting their wealth into directly held alternative investments – tangible assets that provide diversification away from property and the stock market and often promise high returns.

This growth in interest in alternative investments has coincided with the looming pensions crisis as life expectancy increases and pensions become more expensive. Many people are realizing that their pension provision may be inadequate. To quote some slightly frightening examples, a retirement fund of £100,000 would buy an income of only £6,000 annually at today’s annuity rates. And to achieve an income of £20,000 in retirement requires a pension pot of £500,000. This realization is driving the growth in Self Invested Personal Pensions (SIPPs).

So at the same time as consumers are become more interested in alternative investments, they are also keen to take action on their pensions and are taking steps to consolidate frozen or underperforming pensions into a SIPP. Alistair Burns, CEO of The TailorMade SIPP, has this year seen a 69% increase in clients transferring their preserved or under-performing personal pensions into a SIPP.  As part of the advised process they must establish why clients wish to go down the SIPP route – and the desire to get into alternatives is the most often cited reason (alongside the underperformance of current investments and the desire to consolidate funds.)

All of this growth in SIPPs and alternatives represents an opportunity for agents and advisors. With a small amount of effort agents can add a SIPP offering to their proposition. Regulated advisors can advise clients on the benefits (or otherwise) of setting up a SIPP and transferring frozen assets into it. Non-regulated agents can use a SIPP transfer agency – such as TailorMade SIPP mentioned above – to take care of this process for them. The client will then be handed back to the agent with the SIPP funds in place and awaiting allocation according to the client’s investment objectives.

Many advisors are wary of alternatives as the market in alternative investments is now growing very quickly and there are many ‘me too’ opportunistic products on offer. To put some numbers around this – In 2007 there were around 50 directly held alternative investments being distributed that could be held within a SIPP and today there are nearly 300.  These range from excellent investments; to projects that have been rather naively put together; to outright scams. As Peter Robinson, head of Consultancy at Intelligent Partnership explains ‘we reject most of the investments we are offered and aim to add significant value to those we do work with; some are completely unsuited to the retail SIPP market and should never form part of a robust retirement plan. It would be completely irresponsible of us to assist in bringing them to market’. Consequently some advisers still view alternatives with suspicion and view their non-regulated status as a risk for both them and their clients.

Steps have been taken to try and improve this situation. For example the FSA has been very publicly clamping down on advisers who have been promoting UCIS investments to the wrong audience and significantly, SIPP providers have now been asked to take more responsibility for product governance. It is now no longer acceptable to just verify if an asset is SIPP acceptable – SIPP providers now have to undertake their own due diligence.  Robin Hooper, CEO at The Lifetime SIPP Company talks about the challenges this presents. “The range and nature of investments presented never ceases to amaze. As a SIPP operator we need to understand what we are investing into as trustees, whether it be forestry, farmland or perhaps” he jokes “left handed tea-cups from Taiwan”.

To assist in this area Intelligent Partnership have launched a joint venture with Enhance Solutions, SIPP Investment Platform Limited (SIP). Kevin Jack from SIP explains; ‘Over the last couple of years the demand placed on SIPP operators has grown immensely and SIP aims to provide in depth analysis on alternative investments on behalf of SIPP operators so that there is at least some form of product governance audit trail’.

Further security can be built in to alternatives through the use of Trustee or Bond structures.

Under these types of structures the product provider submits to having investor monies paid into a trustee client account and only released to the provider upon adherence to strict criteria as laid out in the Investment Prospectus. Similarly, all of the revenues the asset generates are paid directly to the trustee with investor returns extracted before the balance is forwarded onto the provider. The Trustee will also typically take a first charge over the project and its assets so that, in the event of an unresolved default, the project can be liquidated with the investors reimbursed from the proceeds.

The rise of the SIPP is creating liquid investors – or those that can be made liquid when their frozen pensions are consolidated – and with the widely predicted growth in SIPP numbers the demand for ‘alternatives’ as a hedge against traditional pension investment offerings will no doubt continue. Advisers should take notice and consider if alternatives are something they would like to include in their offering