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The Actuary The magazine of the Institute & Faculty of Actuaries

SIPPs beyond regulation

There have been some very interesting developments in the self-invested personal pension (SIPP) market this past while. Not all have been good. It’s been a very nice niche market up to now and, it could reasonably be claimed, one that has been working for all parties involved.
SIPPs have been a niche segment aimed at the high-net-worth (HNW) individual with specialist SIPP administrators administering the policy in an unregulated environment. It worked. SIPP administrators adopted good business practices, ie they treated their customers fairly and there was transparency around charges. In addition, the HNW individual was financially literate, wanted an element of control over his/her pension, and had reasonable expectations on likely fund performance. Everyone was happy.

Property is the new pension
While the SIPP market has been steadily growing, life and pensions providers, on the other hand, have seen their pension funds depleting as large numbers of policyholders leave, disillusioned with the industry and its catalogue of failures over the past decade:
– pensions mis-selling;
– endowment mis-selling;
– company underfunding;
– poor equity performance.
At the same time, the property market has continued to climb: the buy-to-let market is widely seen by the general public as an alternative pension investment vehicle. Property is the new pension.
Now comes the shift. As the government attempts to make investment in pensions more attractive to the general public, UK savers are being attracted to SIPPs by their tax advantages and flexibility. Savers have been pouring millions of pounds into SIPPs (Data Monitor forecasts that sales of SIPPs will grow from below £1bn in 2004 to more than £2bn in).
This in itself is not a bad thing. But there is a darker side. SIPPs, up to now, have been unregulated. But, as SIPPs are being promoted to attract the mass affluent, commoditisation is sure to follow. And the bigger and traditional life providers are now entering the market.

Principles-based rules
There are a few aspects to this. The first is regulation. SIPPs have, up to now, been sold successfully without any regulation. For the first time, regulation is being introduced to the SIPP market. Coupled with that, the Financial Services Authority (FSA) is moving from a highly regulated/prescriptive environment to principles-based rules. [See article by Andrew Sykes opposite.” The nature of the regulation is not the issue. More important is the behaviour of the providers that are being regulated, as well as the level of knowledge of the consumers for whom the legislation is being introduced to protect.
Does the FSA think an old leopard will change its spots? It was in a highly prescriptive environment that mis-selling took place. The regulator is now introducing the first tranche of regulation in the guise of principles-based rules. ‘Treating customers fairly’ (TCF) falls under the same mantle. TCF can be viewed as vague what is the benchmark, is it clear enough for anyone to understand what it all means, and does the consumer understand? Are the life providers likely to behave differently in the SIPP market than they did in pensions market and in a rules-based rather than prescriptive environment? Are we now likely to see over-promising and under-delivery in the SIPP market? The structure of the industry needs some fundamental changes to shift behaviours. While adviser remuneration remains commission-driven and based on product sales, and providers vie with each other to win the agent in the war for distribution, there will be issues around good advice and churning, and there will be the potential for mis-selling, irrespective of the type of regulation in place. Everybody loses except the adviser.

The mass affluent
Second, with the SIPP target market expanding to include the mass affluent, there is a far greater danger of mis-selling, not least because of lack of understanding. Surveys indicate that even the mass affluent (>£60k personal, >£100k joint income) is not generally financially sophisticated. The industry’s typical target encompasses a wide cross-section with greatly differing aspirations, educational backgrounds, and comprehension levels. Many consumers struggle with pensions vocabulary: the language used in pensions is obscure.
There is a gap between the industry’s view of pensions and the consumer’s view. The industry and government need to stop talking in code. They must communicate clearly and ensure that the consumer understands his/her financial situation in retirement and how his/her financial products will support it.

Education and technology
Education, therefore, is core in protecting the consumer going forward more so than regulation. The adviser plays a key role in consumer education. As previously mentioned, that brings its own issues.
Technology too can play its part. Providers will need to provide key feature documents for their SIPP products for the first time. At this point it is not yet mandatory to illustrate charges and projections. But customer-centric and transparent providers should already comply with the FSA guidelines around projections and illustration of charges.
Now is the time for providers to review their illustration systems. To enable investors to make more informed investment decisions, the new regulation will aim to allow the investor to compare charging structures on different products from different companies. Providers should ensure that they have the systems in place to supply this information in the SIPP market.
Current SIPP providers have treated their customers fairly up to now in an unregulated environment. Traditional providers should not be fearful of transparency. We wait with anticipation to see how the opening up of the SIPP market really affects the pensions market.