Self-invested personal pensions, or Sipps, give us the freedom to invest in what we want.
But while this DIY approach to pensions appeals to many investors, there are mounting concerns that some Sipp providers are doing customers a disservice by allowing inexperienced investors to allocate their savings to unsuitable schemes.
Liberty Sipp is the latest provider to come under fire. According to law firm, Anthony Philip James & Co (APJ), up to 560 people have lost a total of £12m after investing in unregulated investment schemes through Sipps offered by Liberty.
The schemes in question invested in overseas carbon credits, which are permits giving businesses the right to emit carbon dioxide. And while investors are told that these credits can be traded for money, most don’t make any profit.
This is just one example of a wider problem – because, while many Sipp providers only offer standard regulated assets, other operators are still accepting unregulated assets that have no intrinsic value, and are at odds with the basic premise of providing a stable income later in life.
As Glyn Taylor, financial mis-selling solicitor at APJ, points out: “If investments are high-risk or illiquid, they may be inconsistent with the purpose of the Sipp, which is to provide a pension at retirement.”
Weird and not so wonderful
The Financial Conduct Authority (FCA) has issued specific warnings about carbon credits over the years, but unregulated investment schemes come in different shapes and sizes.
In fact, the Financial Ombudsman Service told City A.M. about a range of unusual pension investments that consumers have complained about. These include buying shares in businesses that trace sunken shipwrecks in the hope of recovering treasure, purchasing burial plots with a promised return on investment when the plot is sold, and investing in trees that are sprayed with chemicals to encourage the growth of truffles.
Meanwhile, the number of Sipp complaints lodged with the Ombudsman doubled to 2,051 in the 2017/18 tax year, up from 1,025 in the previous year. Upheld complaints have also surged, increasing by 65 per cent between the second quarter of 2018 and the same period in 2017. Surely these are glaring signs that all is not well.
The flexibility offered through Sipps can be a double-edged sword, says Thornton Wells from wealth management firm Mattioli Woods, pointing out that issues usually arise when investors don’t take suitable advice or have insufficient knowledge.
Indeed, some customers might not be fully aware of the huge risks they are taking with their savings through unregulated schemes. And what’s worse is that unadvised investors can’t seek compensation from the Financial Services Compensation Scheme if an unregulated scheme collapses.
The issue is made more complicated by the fact that Sipp operators are not ultimately responsible for recommendations given by third-party financial advisers.
However, Taylor explains that the FCA expects Sipp operators to properly vet underlying investments schemes and conduct appropriate due diligence. The law firm reckons that we could see tighter regulation around Sipps as early as this year, and perhaps even a complete ban on retail investors being allowed to invest in non-standard assets.
But the question now is why some Sipp operators are not being more stringent. “Unfortunately, some Sipp providers have built books of business very quickly, but on loose foundations,” says Stephen McPhillips, technical sales director at Dentons Pension Management.
“They will have been approached by promoters of unregulated investments, promising to introduce dozens of new clients a month if they can hold the asset in their Sipp.” McPhillips says a number of providers have built their business on very low-cost terms in an effort to scale as quickly as possible.
Several Sipp providers went bust last year after grappling with problems, and McPhillips admits that this reflects badly on the industry as a whole. “Clearly, it is not a good situation for clients and their advisers to find themselves in. However, for providers who have had robust processes in place and which have sound business models, there is a bright future.”
McPhillips thinks Sipps will remain popular, and suggests one of the reasons why consolidation has been limited is because responsible providers have been unwilling to take on books of “toxic” or “distressed” assets.
“So, there is a future for Sipp providers, but it will be a small number of high quality, well-structured, and profitable businesses that dominate the market and continue to grow.”
But what’s positive is that much-needed change is underway. Indeed, Wells says there is now divergence in the Sipp market, with the majority choosing to restrict flexibility to regulated investment offerings, while others continue to offer full flexibility, and have increased regulatory due diligence and capital adequacy responsibilities.
Tips to avoid toxic assets
In the meantime, if you have a Sipp or are thinking of getting one, how do you make sure that you are investing in suitable assets?
First, unless you are fully aware of the risks, avoid unregulated schemes.
Second, watch out for warning signs like a lack of transparency, highly complex structures, obscure global jurisdictions, and lack of liquidity.
Third, a Sipp should be a small part of your entire pension pot, so don’t put all of your retirement savings into one – and certainly avoid putting all your Sipp funds in a single asset class. Also remember that if an investment sounds too good to be true, it probably is.
Meanwhile, Wells says that Sipp providers should assess a client’s suitability by taking into account factors such as previous investment experience, wider wealth, timescales to retirement (particularly with illiquid investments), and how the investor came across the proposed investment.
In time, the promoters of toxic unregulated investments will find it increasingly difficult to find a home for their business – particularly if investors are clued up about the risks.