Self-invested personal pensions (Sipps) should give investors control – the first clue is in the name. Further weight is added in that these schemes are now more properly known as Member Directed Pension Schemes. It was certainly the intention of Nigel Lawson when he announced the introduction of Sipps in 1989 that the member should have more control over the investment of their retirement funds. A permitted investment list accompanied their introduction which covered a wide range of defined investment opportunities and clarity existed in the market.
However, the permitted investment list fell by the wayside in 2006 and in theory the gates were opened for a registered pension scheme to accept any investment asset, with some attracting immediate and penal tax consequences. As a result, Sipp operators chose to decline any such assets, which included any interest in residential property and taxable movable property such as works of art, cars and other chattels.
Regulation, regulation, regulation
This was very much the extent of the Sipp operator’s remit until Sipps fell under the regulation of, firstly, the Financial Services Authority (FSA) in 2007 and more latterly the Financial Conduct Authority (FCA). It is now clear that while the member can propose investments for inclusion in their Sipp, the acceptance of them is now firmly in the hands of the Sipp operator.
By 2009, the regulator registered concern, possibly triggered by the accelerated growth in the Sipp market fuelled partly by a widening range of more exotic investments, and in its first thematic review it outlined requirements that Sipp operators should review the sources of business they were accepting. By 2012, a further review identified “inadequate controls over the investments held within some Sipps” and required Sipp operators to review their business in light of this review’s findings. If ever there was a regulatory shot across the bows, this was it. However, following a third review this year the FCA found it necessary to write to CEOs of Sipp operators on 21 July requiring them to review their business again and specifically to ensure:
– ‘When the firm undertakes non-standard investment business it has adequate procedures in place to assess them and...
– ‘The capital position within your firm is being accurately reported.’
The latter will require a Sipp operator to make a judgement call on whether an asset is standard or non-standard. To help in this regard, the regulator has published a list of standard and non-standard investments with a caveat that if the operator has any reason to believe that a standard asset could not be realised or transferred within 30 days then it should be treated as non-standard.
This has particular relevance since the holding of non-standard assets, in addition to the risk analysis cost, has direct impact on the level of capital reserves required to be held to maintain authorisation to operate Sipps.
More so than ever, Sipp operators will need to undertake a detailed risk evaluation process on all assets held, but in particular non-standard assets which will entail a process to identify, collect, assess and evidence their decision to accept any individual asset and whether it should be treated as a standard or non-standard asset for the purposes of capital adequacy calculation.
So, far from the original remit of not accepting taxable assets, a Sipp operator will need to have a process of risk analysis. The words of the regulator can be seen in Box 1.
