Pensions World

Financial journalist Allison Plager explores the popularity of group self invested personal pensions as an employer sponsored pension scheme

Flexibility comes at a price – or at least it does when pensions are involved. Defined contribution (DC) schemes are the inevitable way forward for companies offering a corporate pension plan, as defined benefit (DB) schemes become increasingly unaffordable. DC schemes can, for example, be a contract or trust based scheme or a group personal pension and all of these have their pros and cons. Whatever the employer decides to do, the options mentioned are likely to have quite limited investment options and this may be where the group or corporate self invested personal pension (SIPP) has a role.

As Scottish Widows’ Ian Naismith says, the main attraction with SIPPs “is that they give extra flexibility to those with large pension pots, especially on investment choice”. He adds that the “market is growing rapidly, but driven more by individuals having reached a level of pension provision where they want more customised investment choice than directly by publicity surrounding pension provision. The GSIPP market is also being driven by employers wanting to offer more to their top staff alongside their standard company arrangements.”

The point of SIPPs, says Greg Kingston of Suffolk Life, is that they “offer a wide and diverse range of different assets for the investor to choose from and the ability to transact on their SIPP at their discretion. A SIPP puts retirement plans firmly in the hands of the individual or their appointed manager/adviser and allows a completely personal approach to retirement planning. This could be investing specifically in a tangible asset, such as commercial property, or taking a very dynamic and active approach to managing the SIPP with frequent share transactions – whatever way the client chooses it is their way and not that of a ‘one size fits all’ traditional pension approach.”

This flexibility is excellent provided everything is kept under control and done properly, but Mr Kingston notes there are “reports of unregulated investments very publicly turning sour and SIPPs have been dragged into the mix as they’ve been used as the means to buy the investment. There’s growing evidence that unregulated collective investment scheme (UCIS) providers have seen pension funds as a relatively easy source of finance to tap and SIPPs are the vehicle they need to do so.” He is concerned that this could lead to SIPPs becoming “synonymous with failed investments and that would be unfair – there are hundreds of thousands of SIPPs in the UK and only a tiny number are invested into UCIS funds”.

Great attraction

Given the attraction of SIPPs, what is a group SIPP? It works in the same way as other occupational pension schemes, but offers a wider range of investment choices and gives members more control. It can also be used as a tax efficient investment by employees to place shares from share plans.

Mr Kingston confirms this, saying “employers with share save incentives as part of their benefit package may find a GSIPP offering desirable to enable their staff to maximise the tax efficiencies available to them”.

There certainly is a demand for GSIPPs, although as AJ Bell’s Billy Mackay says “the market remains niche in nature”. Hargreaves Lansdown’s Huw Bendon says GSIPPs “offer significant advantages over other contract based DC pensions” and expects them to be used “particularly in conjunction with group individual savings accounts (ISAs) as part of a workplace savings platform, to continue to grow rapidly over the next few years”. Referring to the advent of Nest and auto-enrolment, he says “GSIPPs and Nest offer employers complementary solutions, with the Nest scheme addressing the needs of younger, high turnover employees and the GSIPP offering a more sophisticated reward for longer serving or higher paid employees”.

There is increased interest that has been fuelled by the growth in the individual SIPP market and the discussions around auto-enrolment. However, any growth continues to be in scenarios where the majority of individuals in the company are comfortable with the idea of making investment decisions or happy to take investment advice. 

Stewart Dick of Hornbuckle Mitchell says: “Where a collection of like minded individuals have a common investment aim – purchasing a commercial property, for example – a GSIPP arrangement is a very useful tool indeed. It allows them to pool their funds to increase their buying power within the pension, but also allows them to retain autonomy over any other pension investments.

“In a wider context, the group SIPP concept is still attractive for those that perhaps would like a more bespoke approach to their investments but don’t yet need a fully independent stand-alone SIPP, although advisers need to ensure that the proposed solution is appropriate and cost effective for members and the employer.”

Not to everyone’s taste

Employers who choose to offer employees a GSIPP should take steps to ensure that the member or potential member has access to good quality financial advice, as SIPPs are complex.

They are not suited to employees who know little about investment and effectively expect to make their contributions and forget about them – undesirable as that may be. As Mr Kingston says, “with increasing focus being put on the role of the employer in not only offering a pension but also providing access to some form of advice, GSIPPs are unlikely to be suitable for a high number of employers”.

The very flexibility provided by a SIPP will be a boon to some, but a bane to many. Rightly or wrongly, most employees pay little attention to their pension scheme, at least until retirement comes into view, and do not want too much choice. As Richard Prior of JLT Premier Pensions says: “In general, we would not see a GSIPP as being a suitable option for the majority of staff. A GPP with some open architecture on the selection of funds and online functionality will be all that is required for most staff.” He adds that even then, few members “really make use of either function”.

That said, Mr Bendon disagrees with the concept that a “GSIPP is too sophisticated for a general workforce”. He argues that a GSIPP “at its simplest is a GPP, only better. If employees do not want to make any choices their money can just go into a low cost default fund, but for those who want the extra choice, control and flexibility, they’ve got it.”

In fact, providers of GSIPPs try to make clear to whom the plan is best suited. For example, Mr Prior says the JLT Premier Pension GSIPP is “marketed to and suitable for senior management and high earners who require greater investment choice and who want to take more of an active role in the fund selection”.

Overall, Mr Dick concludes that it is “important to understand where responsibility lies within the relationship between adviser and provider. SIPP providers can offer guidance, help and support when looking at particular investments, especially those of a more esoteric nature, but the responsibility for ensuring that the investment is appropriate and suitable for the member lies with the adviser.”

Properly regulated?

Regulation is increasingly important, with calls for the biggest banks to be more regulated as well as investments. In the past, SIPPs have had a reputation for being unregulated; this is changing, but slowly. Martin Tilley of Dentons says: “Following regulation in 2007, it took some time for the Financial Services Authority (FSA) to get a good grasp of SIPPs and how to best regulate them. They have applied a relatively light touch approach to date which it would appear has been insufficient. Recent FSA visits have revealed a minority of SIPP providers who have accepted business without the necessary due diligence or without regard for future business planning.” He is concerned that, as a result, “a more heavy handed approach” will be taken by the FSA “which will quite probably increase regulatory costs and capital adequacy requirements and which quite probably will be passed on to the consumer”.

According to Mr Kingston, “2011 was the year when the FSA started to increase regulatory oversight on the providers themselves and some would say that it is not before time”. He has also heard reports saying that there is “evidence of poor practice in some smaller providers”, but is keen to point out that “small does not necessarily mean bad”. Noting that “the regulatory and compliance overhead is increasing and it is expensive”, he says “firms are struggling for profit and this among other factors is driving the current consolidation mood in the industry”.

Not all feel that more regulation is required. For instance, Mr Naismith says: “The level of regulation is adequate, but we are disappointed that the FSA has drawn back for the present from enhancing the disclosure requirements to be comparable to those for insured personal pensions. We believe this is important so that customers and advisers can compare products and make informed choices.”

Appealing to some

The pensions landscape is continually evolving and, with the advent of auto-enrolment in 2012, employers are going to be busy sorting out their pensions offerings to ensure that they are adequate.

GSIPPs have been available for several years, undoubtedly appealing to the higher paid and more financially astute employees. However, a SIPP of any kind should not be entered into without a good understanding of the product, so obtaining reliable financial advice before investing is crucial.

Table Selection of GSIPP and SIP providers