How the Ssas market has evolved
11 December 2018
This article was originally published on FTAdviser.com on 12th November 2018.
Valentine’s Day 2017 was arguably the day the small self-administered schemes (Ssas) industry got a shock.
This didn’t come from yet another fraudster's actions or a judge ruling a provider should have done better due diligence, but rather the regulator itself.
The Pensions Regulator's (TPR) then executive director for regulatory policy, Andrew Warwick-Thompson, posted a blog on the regulator's website entitled, ‘Helping trustees stop scams’.
The article makes a lot of sense, and I encourage you to read it. However, it is this paragraph that made Ssas providers and advisers worry: “So, I believe that pension transfers to Ssas arrangements ought to be banned. In fact, to put a stop to their abuse, I believe that an outright ban on the establishment of any more Ssas arrangements also warrants serious consideration.”
So what has changed?
On the face of it – not much. Ssas schemes can still be established, transfers to these schemes are still allowed, and there is still no TPR safe scheme list.
But some things have changed.
Both HM Revenue and Customs and TPR requirements have significantly increased for those wishing to establish a Ssas and regarding ongoing reporting. While, importantly, this reduces the potential for pension fraud, it also makes using a professional trustee/administrator almost a requisite. The older readers among you will remember that this once was a requirement.
The number of professional trustee/administrators in the market has broadly remained the same, at around 50. However, this number masks quite a fundamental market shift.
None of the traditional big insurance pension providers are currently open to new Ssas business.
This means there are no household names that consumers would automatically associate with pensions available to them. Interestingly, many of the traditional big pension providers still have a self-invested personal pension (Sipp) open to new business.
With so many Ssas providers still open to new business, we can safely surmise that the traditional providers have not exited due to a lack of demand for the schemes. In addition, there has not been any significant changes in charging structures, so it is unlikely to be profitability.
But let’s keep to the facts. Ssas is a tried and tested pension vehicle and the market is still very much alive and kicking, and doing a great job for thousands of people.
The Ssas market is also the home for those looking for non-standard planning needs.
For example, most Ssas providers are able to facilitate intergenerational planning, controlling (business) assets, saving with non-earmarked benefits plus, of course, borrowing and lending.
The Defaqto database currently details 48 Ssas professional propositions from 42 providers. Interestingly, 73 per cent of the Ssas providers listed also offer a Sipp.
The Defaqto table represents, arguably, the closest there is to a comprehensive ‘list’ of schemes as it rates every Ssas in the market.
One evolving theme we can see is the focusing of propositions to meet specific needs. We can summarise these as being:
- The Ssas all rounder.
- The Ssas for commercial property.
- The Ssas for non-standard assets.
- The Ssas for DB arrangements.
The Ssas all rounder
This is the most common type of scheme - it is the Ssas mass market product.
These schemes broadly provide access to the whole of market when it comes to investment options. However, a number of Financial Ombudsman Service and court rulings have made providers re-examine their due diligence procedures and they are universally more stringent than they were just a few years ago.
The result is that the label may be ‘whole of market’ but the reality is none truly offer this anymore.
While these schemes tend to meet the needs of most, they are primarily designed to facilitate standard assets and be run as an alternative to a Sipp.
Advisers should consider whether the extra flexibility is actually needed, including whether a Sipp is more appropriate.
Referring back to Mr Warwick-Thompson from TPR, in the same blog he stated: “Sipps, which are the subject of far tougher regulation by the FCA, (they) are a safer vehicle for consumers who want control over the investment of their pension pot”.
Presuming a Ssas is the most appropriate solution and access is desired to any of the following, then a more focused Ssas may be more appropriate.
These are designed to meet very specific investment needs and can be the cheaper option, they include:
- Commercial property.
- Non-standard assets.
- DB arrangements.
The Ssas for commercial property
With 96 per cent of schemes able to facilitate direct investment in commercial property there is no shortage of options.
However, when advisers look at the costs involved and the restrictions some providers have in place, it becomes clear that some are more accepting of commercial property on their books than others.
In addition to their standard product costs, most providers charge initial and ongoing costs for commercial property. However, many schemes also require certain types of professionals to be involved including accountants, solicitors and surveyors, and these can represent a significant additional cost that may not be clear at inception.
With at least triennial valuations required, the cost of these ‘extra charges’ and ‘professionals’ can make a considerable cost difference.
For example, many Ssas schemes insist that property valuations are undertaken by a member of the Royal Institution of Chartered Surveyors (Rics).
However, Rics members tend to charge multiples of that charged by local estate agents – who arguably have a better understanding of the local market.
Add together the multiple valuations the Ssas provider requires with the administration costs and the simple task of undertaking a periodic valuation can become a financial burden on the Ssas.
For some schemes the total cost can be just a few hundred pounds, while through other providers it can be quite a few thousand. Remember, this is a charge on an illiquid asset so the cash to pay for it may have to be sourced from elsewhere.
Advisers should therefore be sure to understand not just the ‘standard fees’, but also the ‘extra charges’ that are not always obvious.
Interestingly, what may be considered best practice by the provider and/or professionals may not be in the best interest of the Ssas beneficiaries, especially when value for money and cash flow are assessed.
The Ssas for non-standard assets
Arguably, allowing non-standard assets is both one of the main strengths of a Ssas and one of its main weaknesses.
The ability to invest in non-standard assets can be a useful financial planning solution, especially for small family-led businesses. But, non-standard assets held in a Ssas is also a well-known vehicle used by pension fraudsters.
Despite a number of FOS and court rulings we have not seen a notable reduction in the number of Ssas schemes which facilitate investment in non-standard assets.
In fact, this isn’t entirely true.
Nearly all providers have introduced tougher due diligence procedures, however, many have also introduced higher charges for facilitating such assets. So while the ability to use non-standard assets exists, the provider may still decline to allow a specific investment.
In addition, where investment in a non-standard asset is allowed, the costs levied may not make it an unattractive solution.
When selecting a Ssas, researchers should evidence that they have considered any potential liabilities the provider already has due to holding non-standard assets and the implications this has had on their advice.
The Ssas for DB arrangements
This is a new style of Ssas that has certainly caught the interest of a number of providers and we therefore anticipate this option being adopted by more of them in the future.
Let me be clear, this solution is not about replacing a defined benefit scheme with a defined contribution one. It is about taking a small DB scheme that is struggling to find value for money and giving it more freedom to operate while ensuring it continues to meet its DB commitments.
These schemes can be set up with cash transfers and/or with in-specie transfers from the existing DB scheme. New DB arrangements can also be established.
In essence, these schemes combine the benefits of a Ssas with a defined level of scheme pension.
Costs need to be considered though, as each scheme requires an actuary. Their role is to calculate the contributions required to meet the defined benefits.
They are also responsible for complying with and reporting on HMRC allowances and limits for the schemes and individuals.
The DB Ssas allows the pension income to be paid as a scheme pension or for an open market annuity to be purchased.
In addition, transfers from DB to DC to access the pension freedoms may also be allowed, subject to the usual checks, balances and agreements.
Land of opportunity
The Ssas market is still the open land of opportunity, but it is no longer the 'Wild West'.
Tougher HMRC and TPR standards combined with providers carrying out more stringent due diligence on assets, is pushing the fraudsters out.
From an adviser's perspective Ssas represent an opportunity and can be used with greater confidence than before. That said, issues to consider include:
- Matching the Ssas to the client’s needs has become harder. This is because providers want to be seen to be 'open market' but most have understandably introduced due diligence procedures and charges designed to control their risks and exposure to certain asset types and this has resulted in 'restricted open market' offerings.
- Advisers (paraplanners) should evidence that the features and benefits match the stated needs but also that the total Ssas solution and relevant charges represent ‘value for money’. Doing this will help evidence that an appropriate style of Ssas has been selected.
One last point, advisers should check that their Professional Indemnity (PI) insurer covers them for recommending Ssas, especially where non-standard assets are being used.
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