Commission on group pensions is under pressure from all sides. James Phillipps looks at what the future holds
Any talk of the death of the market for small self-administered schemes appears overblown, but the product is becoming an ever more niche arrangement for clients.
The changes at A-Day virtually equalised the investment rules between SSASs and self-invested personal pensions, prompting several industry heavyweights, including Friends Provident and Skandia, to offload their SSAS books at the time in the belief that business would dry up.
More recently, a number of commentators have said that the move to allow Sipps to hold protected rights has put the SSAS market under further pressure.
However, while two and a half years on from pensions simplification Sipps may still be dominating the headlines, a niche market remains for their less feted counterparts.
“Since the rules were harmonised at A-Day, Sipps have really grown in popularity and are seen by many as more straightforward,” says Andrew Roberts, a partner at Barnett Waddingham and head of its small schemes department. “We may have seen the death of the insured SSAS market but they remain a more suitable product for some business owners and there is still a market for them, albeit a thinner one than before.”
Comparisons between the two pension wrappers are always a bit thorny. Both are commonly used by small businesses, such as dentists or lawyers, to buy their practices. While it is generally cheaper for a firm with several directors to run a single SSAS than for each individual director to have their own Sipp, there is no doubt that SSASs retain a number of key attractions above and beyond this cost saving that are unique to the product.
Prime among these is the ability to offset contributions against corporation tax and for the scheme to loan up to 50 per cent of the value of the pension fund’s assets to the sponsoring employer.
David Seaton, a director at Rowanmoor Pensions says to focus on investment freedoms is missing the point and it is these factors, coupled with the independent trusteeship of the scheme, that continues to make SSASs appealing to small business owners.
“Sipps are sold as vehicles for managing investments, which is all well and good, but they do not give business owners the control they want over their scheme,” he says.
“The choice of taking out a SSAS is nearly all driven by tax planning and the will of the directors to keep control of their money and how they can best use it to support their business. Because of this, SSASs remain the pension of choice for the entrepreneur.”
The loanback facility enables the directors of the firm to access capital, which would otherwise be locked away if the company had opted for a Sipp. The loan must be secured against assets of equal value and have a maximum term of five years. HM Revenue & Customs also requires that it is charged at a competitive rate of interest, at least 1 per cent over base rate.
“This is particularly valuable in the current market where the banks are not keen on lending. Cashflow is a problem for a lot of small businesses and causes many to fail. By using the loanback facility, the directors can often secure a rate which is better than they could at the bank and the interest is paid into the pension scheme,” Seaton says.
However, others argue that there are dangers in this that should not be overlooked.
John Lawson, head of pensions policy at Standard Life, says while he accepts that the loanback can be a cheaper way of accessing capital than other routes, such as factoring or invoice discounting, there is a danger that directors unwisely use the cash to prop up an ailing firm.
“If you have a loss-making business, using the pension scheme to keep it alive might not be a good idea. The SSAS will have to check where it ranks among creditors although it should not lose out because the loan is collateralised,” he says. “The danger is that value is lost somewhere if the business subsequently fails, whether it is the directors’ personal wealth or creditors that take the hit.”
It is certainly unlikely that an insurance company acting as a trustee of a Sipp would be disposed to such a large investment in a single small business, he notes.
That said, it is this flexibility that finds favour with SSAS holders. Roberts says insurance company Sipps tend to be more off-the-shelf products and a large insurer is unlikely to allow more esoteric business properties or assets to be held in the scheme. In contrast, many smaller independent SSAS providers have demonstrated their willingness to accept the more unusual. (See box opposite).
Conversely, where SSASs can fall down is in there ability to accept the more mainstream. Directors with equity stakes in their businesses are only permitted to hold 5 per cent of their shareholding in a SSAS, while there are no limitations within a Sipp.
This prompts Roberts to favour SSASs for family businesses and Sipps for companies as a general rule.
The permitting of protected rights into Sipps from October 1 shines the spotlight on another limitation SSASs have that their counterparts do not. (See box overleaf)
Opinion is divided on the likely impact of this on the market.
Mike Gough, an executive director at Jelf Private Clients, says this could potentially further marginalise SSASs. He notes: “The fact that Sipps can now accept protected rights, whereas SSAS cannot, will inevitably strengthen the Sipp route and may indeed lead to some movement of SSAS schemes across to Sipp. I do not believe that it will kill the SSAS market though as the loanback advantages remain.”
On the flipside, Roberts believes the impact will be marginal as the majority of small business directors, particularly, family concerns, do not have significant pots of protected rights.
“The large pots of protected rights tend to be held by people in final salary schemes and these are not usually business owners. If directors have £20,000 to £30,000 of protected rights but £1m in other benefits they are not too worried about being able to self-invest the protected rights,” he says.
Seaton also believes that SSASs greater flexibility around at-retirement solutions can more than compensate for this in most cases. Given SSAS is an occupational arrangement, directors can opt to take a scheme pension rather than drawdown, an alternatively secured pension or annuitisation.
Unlike with ASP, which allows a maximum withdrawal of 90 per cent of GAD rates at age 75, scheme pension allows holders to take higher income payments that are actuarially verified.
“You can take 100 per cent income and guarantee it for 10 years, which you cannot with ASP. You can also build annual rises of 5 per cent increments into this and pass it on to a spouse if you die,” Seaton says.
However, any assets left within the pension pot at death will be taxed punitively at 82 per cent, as with ASP, although the pot can be run down quicker.
Lawson warns there is a risk that if unrealistic actuarial assumptions are made, then the SSAS fund could run dry early and notes that it does not benefit from the mortality cross-subsidy like an annuity.
“I think scheme pensions pull the wool over people’s eyes. They use actuarial trickery to make it look like you can draw a higher income,” he says. However, some point out that many Sipp providers also promote their ability to run down funds in drawdown.
Clearly the issue of scheme pensions remains contentious as are most of the issues around the benefits of SSAS over Sipps.
Seaton is adamant that business levels remain constant despite the growth in popularity of Sipps since A-Day. Industry sales figures are notoriously difficult to find because many of the leading SSAS providers are not members of the Association of British Insurers and so do not file their data with the trade body.
“My feeling is that SSAS sales have almost certainly tailed off as generally Sipps are perceived as simpler and more individual based, although in practice there are few differences these days,” Gough says.
He says that on one level it basically comes down to which is more important to the client- the loanback facility or the ability to self-invest protected rights.
Lawson is more downbeat, expecting Sipps to grow in dominance and SSAS books to run off over time because most holders are in their 50s and new business is slowing.
“Someone like Rowanmoor that has economies of scale and can mop up smaller books is in a good position but ultimately it will run off like defined benefit. The drivers are pushing people away from it although it will have a long tail,” he says.
Standard Life has hedged its bets, continuing to offer SSAS alongside its Sipp business. The smart money may be on Sipp’s dominance growing but it is a brave man that bets against the doughty SSAS market from continuing to carve out its own niche.
Some of the more creative uses of SSASs
No-one can ever accuse corporate advisers and their clients of a lack of imagination judging by some of the more esoteric business assets that have been sold to their SSASs.
Many entrepreneurs have certainly made full use of the pension wrapper’s flexibility in order to raise cashflow for their firms. Virtually any business asset can be, and has been, sold into a SSAS. It is then leased back from the pension scheme at the market rate by the company.
“We are constantly surprised by the innovations of small business directors,” says David Seaton, a director at Rowanmoor Pensions. “We had one client that owned a large commercial unit and the pension scheme bought the lift shaft and then rented it back to the business.”
Last month, Rowanmoor had to line up a third party specialist to value another client’s yacht mooring with a view to it being sold to his SSAS.
“We have also had a number of companies sell their patents and copyrights to their pension schemes and then lease them back,” Seaton adds.
Andrew Roberts, a partner at Barnett Waddingham and head of its small schemes department, has fielded some unusual requests too.
“We have a few clients who have sold their car parking spaces,” he notes.
Clearly, the limitations to the type of things that can be sold into a SSAS are only restricted by the imagination of the client and his adviser as long as they are genuine business assets.
Where Sipps won out over SSASs
The industry has fought a long and arduous campaign to persuade the Government to allow the estimated £100bn worth of protected rights into Sipps. SSASs have been refused this flexibility to date, not least because they are not regulated by the FSA, although Sipps had to wait several months after regulation to get authorisation.
Pension experts’ argument that insured funds were no safer a home for these assets than self-investment fell on deaf ears before the Department for Work and Pensions offered a ray of hope in 2005.
Following a broader consultation into protected rights it stopped short of a blanket ban preventing all Sipp schemes from holding protected rights. The caveat was that they had to remain in insured funds and the assets held in a separate pot pending a further review after A-Day.
Frustratingly for Sipp providers, this did not take place until December 2007, a full eight months after the products came under FSA regulation.
The DWP finally accepted that the bar was no longer required, but waited until June to inform everyone that it would be removed, albeit not until October 1, 2008.
Sipps had already become a buzzword and with a new line to capture pension savers’ imagination, the major industry players quickly swung into action.
Standard Life started accepting transfer applications in late August and Fidelity from mid-September, while Hargreaves Lansdown sent a mailshot to hundreds of thousands of investors alerting them of the opportunity to switch.
Andy Pennie, marketing director at James Hay, says: “The great news for IFAs and their clients is they can now actively move protected rights money to Sipps to take advantage of the greater investment choice. The exclusion of protected rights from Sipp policies has been an obvious omission for some time.”