In this second article I look at some of the current issues and challenges, focusing again on those dominant features: technology, complexity, (inconsistent) government policy, (increasing) longevity and the evolution of Financial Planning. I also have a few words to say on the SIPP market.
I will start with the complexity of the current pensions tax regime. It is nearly 20 years since Alan Pickering formulated his original pensions simplification proposals. Those were watered down by the time of their introduction in 2006 and since then many new layers of complexity have been added.
I believe the time is right to introduce a new simplified tax regime for DC pensions - which of course is now the main mode of pensions accumulation for the majority of savers apart from those privileged members of DB schemes mainly in the public sector. A separate tax regime for live members of DB schemes would still be required.
The complications caused by applying one tax regime to two quite different savings methods are obvious – not to mention the additional costs which are huge and unnecessary. There has been considerable focus on “value for money” and “charge capping” by both pension regulators recently – as an aside why not have just one regulator for all DC pensions – and one obvious way of increasing “value for money” would be to simplify the rules.
It ought to be easy to design a simple DC regime that has annual contribution limits – but no Lifetime Allowance thereby doing away with the current injustice of potentially taxing good investment performance. Concurrent DB entitlements will remain an issue for many years but a pragmatic approach could remove most if not all of the current BCE calculations. The need for capped drawdown could disappear and all DC decumulation would be treated in the same way.
I believe the current pensions tax regime is unsustainable in a post-pandemic world so changes will be needed – but these should sit alongside a fundamental overhaul and simplification of DC pensions savings so that the cost savings could be reflected in lower charges and would help offset any adverse taxation burden. Simplification would also increase the level of understanding and appeal of pensions particularly for the younger generation for whom pensions saving looks likely to be even more of a challenge in the years ahead.
Technology will also assist in improving the appeal of pension savings. I make no claims about my expertise in this area but I am encouraged by the growing numbers of new “challenger” providers in the retail pensions sector who are proving serious competition for traditional providers and who may just drag the pensions world out of the digital stone age. There is a long way to go and a lot of ground to make up – and I am really only talking about DC pensions.
One area where technology can really help is in improving the understanding of the impact of increasing longevity. The pandemic may have diverted attention from this subject but the impacts of demographic change cannot be ignored, especially with future generations likely to be less 'asset rich' than the current generation of pensioners. More data and information on healthy longevity, less able longevity and dependency is becoming available and can and should be made more widely available. The steady increases in length and quality of life will become all important for decision making in later life.
Technology will also be very important in shaping the future of financial advice and planning. The pandemic has shown that there are viable alternatives to face to face meetings and one can expect to see developments in robo-advice and AI that will enhance the delivery of holistic advice rather than replacing it. That will be particularly true with the transactional needs of many, especially younger, clients.
Finally, a few words on the current state of the SIPP market. It can probably be summed up, “It’s a SIPP Nigel – but not as we knew it”!
Of the nearly 3 million SIPPs owned today some 85% are of the “streamlined” variety with investment largely limited to “standard” investments. Of the £90bn of SIPP assets invested in “complex” SIPPs that allow non-standard investments (NSIs) a significant portion is in commercial property. The actual amount invested in “distressed” assets is unknown but I would suggest it is around £10bn – about 3% of the total SIPP market assets.
It is the SIPPs holding “toxic” assets that have been in the spotlight over the last few years as a result of a series of court cases and provider failures. Most of these investments were made in the period 2010-2013 although some of the legal claims date back further. The failed investments have given rise to a torrent of legal claims many fuelled by claims management companies. The impact of these claims - however spurious – is often overlooked. Each claim is a significant administrative burden for the provider – the cost of which is borne by all investors.
Although the FCA’s deposition in the recent Carey Pensions judgment found little favour with the judge it would appear that in this case the claimant’s lawyers were sufficiently encouraged to launch an appeal. Whether ultimately this case will prove to be a precedent for the many claims that have reached the FSCS or FoS remains to be seen. I think that clarity around the expectations of all parties involved in the establishment and operation of SIPPs is long overdue.
However, the Carey’s case is not about standards that apply today or in the future – it is about events that took place many years ago – and what could reasonably be expected of a SIPP Operator at that time. It is unfortunate that the historic lack of clarity is still giving rise to legal uncertainty. Had the FCA accepted that most providers were acting in good faith based on their understanding of the regulatory requirements at the time a line in the sand could have been drawn on these issues some years ago.
As it is I fear that it may still be many months if not years before these historic matters are finally resolved. However, that is not a reason to delay clarifying the regulatory regime for the future.
As I have suggested before I believe the answer is to allow “streamlined” SIPPs only to invest in “standard” assets. “Complex” SIPPs allowing NSIs would only be available to high net worth and sophisticated investors and the onus would be on providers to ensure that this is the case. It is a simple step to take and while it might not provide 100% protection from the scams and frauds that have plagued the SIPP market for years it would provide much needed clarity for all parties involved.
John Moret is principal of MoretoSIPPs consultancy and one of the UK's most experienced SIPPs experts, commentators and speakers. He has worked for Suffolk Life and several other SIPPs providers. He is chair of advisory business Intelligent Pensions and CX insight business Investor in Customers.