Get under the bonnet

How advisers research the quality of Sipps is a complicated task, but there’s a lot more to consider than just cost and product features

Cut from the same cloth

The Sipps market has evolved at a phenomenal pace since A-day, but the second generation must take care not to expand in a way that damages the traditional product

Taking change in your stride

Clients and providers alike must move with the times and adapt their plans and products to gain most benefit

A new pensions challenge

Consumers are living longer and moving jobs more frequently, and the market must change fast to meet their individual retirement lifestyles

The new twilight years

As the financial situation for so many over-50s in the UK is changing, so must the products and services offered by the financial services industry. For, if they are taking care of their children and parents, who is taking care of them?

Sniffing out the market options

The urgent need to plan for retirement is reflected in the diversity in financial portfolios available. But which savings vehicles are the most relevant, and how does the increasingly popular Sipp fit into this decision?

Seeking income security

The new buzzwords in pensions are ‘variable annuities’ and the ‘third way’, but what do they really mean and what is their relevance to the UK market?

Plugging the market’s gaps

The popularity of Sipps is continually increasing, but awareness among the affluent is still patchy. How will this affect future market trends?

School for Sipps

John Moret advocates flying the pension flag as early as possible, and has evidence to boot...

The changeling – Sipps from niche to mainstream

The demographic of the Sipp investor is broader than ever before, and the plan is now accessible to less wealthy investors. But how will the market respond?

The simple life

To what extent has A-day affected the traditional, and the self-invested, personal pension?

RU getting good advice?

RU64 might mean more paperwork in the short term, but providing the correct advice to a client reaps long-term rewards

Specialist annuities set to grow

Who would have thought it? Annuities have become such an exciting

Mike Pendergast

1. Consumer choice has been widened by the additional options now available to individuals looking for alternatives to a standard annuity. This has led to increased press and media comment which has, in turn, increased clients’ knowledge of what is available and OMO is certainly more widely understood. An increased number of clients are utilising the facility, whereas previously they would blindly accept whatever figures were produced by their pension provider – mainly due to the fact many providers did not bring OMO to their attention in order to retain their business. A-day has certainly served to educate the general public in this area.
2. If the government succeeds in restricting ASP to its originally intended target area, this will mean that individuals will have no option but to purchase an annuity at age 75. However, the increased options in the annuity market, for example value protection, will still give clients a wider choice than they previously had. It depends on what the government does to close this perceived ‘loophole’ in the A-day legislation as to what effect this will have on annuity and ASP holders – if it is withdrawn altogether there will certainly be a demand for more flexible annuity products and this can only be good for policyholders as a whole.
3. This will increase, leading to enhanced efficiency and greater turnaround of cases, which can only be good for both adviser and client and, indeed, provider. The majority of cases should be able to be electronically underwritten leaving only the more obscure and/or complicated cases to be dealt with manually. The major benefit to advisers and clients of electronic underwriting is that an annuity quotation for an impaired and/or enhanced case should be able to be provided quicker, perhaps via the provider’s website – this will lead to greater efficiency on the sales process which can only benefit the consumer and the adviser.
4. Wider range of medical conditions being considered for enhancement, and perhaps individual underwriting extended to include illnesses which may have a smaller impact on morbidity. Providers will also look to differentiate themselves by offering enhanced annuities for a wider variety of illnesses, which would not currently qualify for an enhancement. I can see an increased number of general annuity providers.

Michelle Cracknell

1. We are only just starting to see new products entering the market which have picked up on the increased flexibility post A-day. By definition, flexibility will increase options and therefore complicate the decision making process for those individuals converting their pension fund to an income through the purchase of an annuity. The understanding of annuities and use of OMO is not as great as it should be. One of the barriers that exists is the cost to an adviser of advising a client and facilitating the purchase of the annuity. This is fairly constant regardless of fund size and hence it is not economically viable to advise clients with low pension fund values unless he charges a fee. Clients are unlikely to be prepared to pay such a fee.
2. ASP will only be suitable for a very small proportion of individuals. Under ASP, there will be inheritance tax due on the funds and the beneficiaries will not have cash but an increase in their pension fund, which may make them less reliant on the state. For these reasons, banning ASP is unnecessary and may be damaging by discouraging individuals to save towards their retirement. The focus should be on encouraging people to save towards their retirement. Even though ASP is unlikely to be widely used, removing this facility is likely to continue the apathy toward pensions.
3. As we have seen with other products, efficiencies can be achieved through electronic underwriting. However, underwriting is complex, especially when it is trying to establish the impact of medical conditions on an individual’s life expectancy. Hence, electronic underwriting is only likely to split out the applicants who may be able to benefit from enhanced rates and those that definitely cannot benefit. In our view, the requirement for doctor’s reports and medicals will still be necessary to determine the rate the annuity company is prepared to offer.
4. The innovations and new annuity products expected are: value protected annuities where the annuity provider guarantees to pay out the entire purchase price as income, regardless of whether the annuitant survives; hybrid annuities which have an element of the guarantee of the conventional annuity but retain some investment element, and annuities that offer greater flexibility on how and when the income is paid.

Christopher Wicks

1. The ability to purchase value protected annuities has opened up an avenue that must be considered by clients. In theory they go some way towards dealing with a major concern of clients – the loss of funds when they die. It’s difficult to see whether the new types of annuity will really offer a better alternative to ASP/USP. Impaired life business is becoming more readily available with some providers offering more streamlined processes. Many clients are still failing to take up OMO. A-day has had little impact on this. It will require a continuous effort by providers and advisers to get the message across. Consumers need to become better educated financially and the responsibility for this lies not just with the financial services industry.
2. It seems highly unlikely they will be able to do so on the grounds of religious prejudice (yet again they seem to have failed to think something through). However, if for some reason they are able to enforce a scenario where only members of certain religious groups may implement specific retirement options, one or both of two things will occur: the number of Christian Brethren will rise substantially or more people will buy annuities. Under the latter scenario less people will buy pensions, since one of their major objections includes the loss of flexibility and funds to their family when they die.
3. This already seems to be happening with some providers and is a major improvement in the market place. It would appear that a substantial proportion of the population will qualify for enhanced rates because they smoke, etc, and can qualify for them straightforwardly. This requires consumers to have a better awareness of the availability of the open market option.
   The whole process needs to become more automated from comparative quotation to company specific and application in the way that life assurance can be arranged. At the moment the process is still very laborious for advisers and even more so for clients.
4. I expect to see the increased use of electronic underwriting and more streamlined processes. More providers moving into the market if they can access it cost effectively, and profitably through greater use of technology. Also greater refinement in terms of the conditions for which enhanced terms will be offered and increased availability of the new choices since A-day, including the ability to transfer funds, albeit for a price.

Matt Trott

1. Pensions simplification allowed us to add value protection to our range of enhanced annuities. This protects the value of a customer’s annuity should they die before reaching age 75. In this event, a lump sum will be paid to the customer’s beneficiaries representing the original annuity purchase price, less the aggregate amount of income already paid (less tax) from the annuity. A-Day significantly increased the awareness of retirement issues among the public, although we have yet to see this result in an increase in the take up of the OMO as a result.
2. Given the current restrictions placed on the benefits of ASP, I believe that it will appeal only to a small niche of high net worth customers. Indeed, for the vast majority it will continue to be in their best interests to annuitise funds well before their 75th birthday, and thus the impact of ASP on the annuity market is likely to be small.
3. If a smoker or someone in ill health has a lower than average life expectancy, it is only fair that they receive a higher annuity rate – after all, they are unlikely to receive their annuity for as long as someone in good health. As underwriting processes become more sophisticated and technology improves, it is becoming progressively easier to provide electronically calculated annuity rates based on a customer’s specific lifestyle and medical conditions. This means that customers can be sure that they receive a fair rate based on their personal circumstances; that advisers have access to annuity quotations 24/7; and providers can benefit from the cost reductions arising from increased automation.
4. Currently, the at-retirement market is pretty much polarised. At one end there is an annuity, which is a cost efficient means of converting a lump sum into a fixed income stream guaranteed for life. At the other end of the market is the Drawdown contract, which offers significant flexibility in terms of income, investment and death benefits, but this brings additional risk and higher costs. There is a demand from consumers for products that combine the best features of both an annuity and a drawdown, and providers will continue to seek products that provide the flexibility of drawdown within low risk structure of an annuity.

Annuities Q&A
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The true value of good advice

The NPSS promises pensions for all, but will it offer comprehensive advice and guidance to those unsure about their choices? Matt Trott looks specifically at the area of annuities

Which path to follow?

Many trustees are constantly searching for the highest return investments, but, says Benjie Fraser, with such a wealth of possibilities available to them, making the best choice is proving increasingly difficult

Introducing the new age pension

John Moret recently watched a group of teenage girls come up with a revolutionary way of looking at pensions. He wonders here whether they actually went far enough

Sipps – the latest bestseller

They may not be selling like the proverbial hot cakes just yet – but Sipps undoubtedly represent an outstanding new business opportunity for intermediaries says Jan Regnart

A real alternative to stakeholder

Although providers have spoken of the potential for Sipp within the group market, many considered it to be the usual industry hype, But there are strong signs of demand for this kind of solution, says Pádraig Floyd

Sharing in the group experience

The world of corporate pensions with its default defined contribution scheme now has a wealth of options opening up, including both standard and group Sipps. Hyman Wolanski ponders the choices available

Bringing home the bacon

The key to successful residential property investment will be a cool-headed review of an investor’s attitude to risk, time horizon and existing pension fund assets, says David Marlow

Saint or sinner – which to choose?

Ruth Emery asks some Sipp experts for their views on the different asset classes that will be available to investors after A-day

Nick Bamford

1. I am confident that the industry is geared up for an upsurge in the interest in Sipps. At the very least everyone seems to be talking a good game. There have been only a few noticeably poor Sipp providers historically and in the main the Sipp providers have tended to have better administration standards than the conventional providers. I would, however, want to know that the Sipp provider I choose today is going to be adequately resourced to deal with any increase in volume that comes about later on.
2. I see consolidation as one of the big growth areas. Many existing conventional pension plan holders have grown disillusioned by the past problems of these types of plans and are quite attracted to a plan where they can control the investments. With the development of asset class modeling tools and a much easier flow of information, clients find the Sipp proposition quite compelling. As one of my clients said just this week at a review meeting: “For the first time I now understand what is going on inside my pension fund.”
3. There is a possibility that they could replace personal pensions and stakeholder plans. Sipps need not be costly and they open up the whole investment world. That said I suspect there could still be room for feeder plans until the personal pension or stakeholder plan reaches an optimum size.
4. The biggest problem is that simplification, in particular the opening up of investment choice, creates a huge demand for information but for the vast majority of enquirers, residential property, works of art, fine wines and vintage cars will be inappropriate, unsuitable and simply not possible. I shouldn’t complain, after all the business we are in is that of selling advice on such matters.

Karen Rickman

1. I doubt it very much, of course there will be IFAs who are already in this market and are very proactive with regard to A-day, but a large percentage of IFAs will be oblivious to the opportunities available for their clients simply because they are not working in that market. The providers will see this as an opportunity to increase distribution of a simplistic version of Sipp at low cost to the mass market, but it will be little more than a personal pension with a large range of funds.
2. Definitely low cost for the reasons above, but I also think that group Sipps could become more widely used as the cost reduces. I suspect that property, commercial or residential will still only appeal to those with large funds due to cost and the need for diversification of assets.
3. I think the general public at large will fail to notice and only those lucky enough to be able to afford independent financial advice will be aware of their existence and apply the benefits to their personal financial planning. Mass-market Sipps will be low cost, very simple versions as described in above. The public are unlikely to be aware of the detail in pension simplification or what that means for them.
4. Our main concern with regard to simplification and Sipps when advising clients is the apparent lack of clarity in some areas of the legislation. The Inland Revenue is still unable to help in a number of areas because it has yet to figure out how some aspects may be applied in practice. This makes some of the opportunities difficult to maximise when advising clients as we are working with the unknown.

David Baker

1. There has been much debate about the consequences of simplification but one suspects not a great deal of practical activity. Part of the reason for this is the lack of the detailed regulations, which are now expected in August or September. This is a very short timescale in which to do systems development, recruit staff and produce literature in time for A-day. The gearing-up will therefore have to happen very quickly and some organisations may struggle to cope with this.
2. We think that residential property will drive the market in the short term post A-day. Media attention has ensured a wide coverage of the possibilities and there seems to be a great deal of interest in the market from the enquiries we are getting. We do not expect it to have a great deal of impact on commercial property investment – indeed, this could be slightly negative given the more restricted borrowing parameters and the focus on residential property. Family Sipps will have to await the outcome of the Inland Revenue review on inheritance tax aspects. We think group Sipps will increase, particularly with the increased permitted contribution levels, possibly replacing the traditional executive pension plans.
3. Yes, the pensions market is moving towards the Sipp model and A-day will give it a significant boost. The Sipp market will change from being for older, high net worth individuals who have already built-up significant pension funds during their careers which they wish to transfer to a Sipp, to a younger market able to put in significant contributions to create a Sipp without the need for a pension transfer. In addition, people are more interested in undertaking their own investment strategy than has been previously the case and companies will have to compete for market share as new pension providers come into the market post A-day.
4. The two main problems are coping with the practical changes to administrative systems that will be required post A-day and the amount of work that will have to be done to change the current format. There is very little time left to do this and one suspects most pension providers are awaiting the more detailed regulations before undertaking systems work. In addition, if the newly permitted investments really take off, it could be quite a challenge to cope with these from an administrative viewpoint, both in the context of their complexity and the sheer volume they could generate.

Peter Clarke

1. Yes, I think that they are. As far as the IFAs are concerned, many have seen the advantages for larger funds being invested in Sipps already and have geared up for this. The main difference after A-day will be less restriction on investments – mainly property.
   Many providers are now strengthening their propositions by utilising inhouse administration systems rather than contracted-out administrations, thus reducing costs.
2. In the early stages it will be property and I see houses abroad being an early attraction. After 18 months or so, this will wane because of the problems that will arise with the need for income returns and the very high legal costs on the continent. Add to this the old problem of illiquidity of property and possible decreasing values. For instance, if you buy a house in Spain for £200,000, legal costs would be £20,000 and the house is still only worth £200,000. Clearly £20,000 has to be made up by house price inflation or the Sipp has a large deficit.
3. I am sure they will but they are growing now. The rate of growth will only increase because of the wider investment possibilities.
4. Oh yes, there will be problems – investment freedoms can also lead to investment madness. I cannot favour residential property (other than buy-to-let) as being sensible because of the need for income from the property. The new rules will make it difficult for the purchase of commercial property. At present Sipps have unlimited borrowing towards a purchase, after A-day borrowing can only be up to a maximum of 50% of the fund value. This will restrict many would-be purchasers.

Gearing up for the expected post A-day surge in Sipp business
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— Post A-day it will be possible to purchase overseas property for one’s own use

Going from strength to strength

When Sipps were first introduced in 1989, there seemed little room for them in the pensions market. However, events since then have seen Sipps become a major force to reckon with, says David Baker

Get on the ladder with a Sipp

In addition to commercial and onshore property, investors have to consider overseas property when using a Sipp as an alternative investment vehicle for pension planning, says Peter O’Sullivan

Everybody’s going to want one

A-day will signal the dawn of a new era as greater investment freedom and law changes will see millions more signing up to Sipps – from home owners to high flyers, writes John Moret

Arthur Rakowski

1. Infrastructure assets such as roads, rail, airports, water utilities, roads, electricity and gas transmission networks can be attractive investments for those with a longer time horizon, such as pension funds.
   The long-term, essential nature of these assets provides stable, predictable and sustainable consumer demand and cashflow along with a relatively low volatility of return. They also have low correlation to other asset classes, which helps to truly diversify a portfolio. These sustainable yields, typically inflation-linked, are appealing for pensions funds because they provide a match for a defined benefit plan’s liability profile, along with a risk-adjusted return well in excess of available alternatives.
   In more mature markets, such as Australia and Canada, data is now available to show that infrastructure is providing pension funds with consistent out-performance against listed equities, coupled with annual volatility closer to that of bonds.
2. As an asset class, infrastructure provides stable absolute returns under most market conditions. It is the ultimate defensive investment, largely insensitive to the economic cycle and uncorrelated to other asset classes.
3. As explained above, assets providing essential community services present attractive opportunities as alternative pension fund investments. The long-term, sustainable nature of the assets and their cash flow is a strong addition to a diversified pension fund portfolio.
   The best way to access these opportunities depends on the internal resources and expertise of each investor as well as each institution’s general investment model (many funds may only consider general, pooled investments). In order to maximise equity returns, infrastructure assets require active management and extensive specialised sector expertise.
   Investing through specialised infrastructure funds provides the dual benefit of accessing long-term sustainable characteristics of the underlying assets, supported by specialist infrastructure asset management. In the case of Macquarie’s family of infrastructure funds, asset management teams are made up of industry specialists – previously involved in running airports, utilities, telecommunication etc – working alongside financial and regulatory experts. Further, a managed fund would typically provide exposure to a diversified portfolio of assets (and associated returns), which would be difficult to achieve through direct investment.
4. In terms of geographic diversification, UK pension funds should consider infrastructure assets in the same way as they do any other asset class. Additional factors to consider include:

Guy Pigache

1. For many pension schemes, the appeal of PFI equity is likely to be as part of the toolset of alternative assets that can be used to increase yield and enhance risk diversification. In particular, PFI equity offers a way to enhance returns meaningfully without assuming the high risks often associated with investment in venture capital funds or management buy-out funds.
2. PFI public bond issues offer long-dated yields at a premium to equivalent gilts, and could be considered for inclusion in a pension fund’s fixed income portfolio. Equity investment in PFI projects offers excellent risk-adjusted returns and could be considered as a stand-alone investment as part of a pension scheme’s allocation to alternative assets.
3. PFI markets offer a variety of investments with differing risk and return profiles. Decisions about whether to invest in PFI equity or bonds, and whether to invest in the primary or secondary markets (or both) will naturally depend on each specific scheme’s risk and return objectives and the shape of its existing portfolio of alternative assets. PFI bonds provide the lowest risk returns, while PFI equity provides higher returns but requires the selection of a specialist fund manager. PFI projects that provide for the provision of traditional assets – such as office buildings, schools, roads and fire stations offer the lowest risk.
4. The UK market has immediate attractions for UK pension schemes in that it has the greatest volume of investment opportunities and sterling-denominated investment instruments.  Other European Union countries are beginning to embrace PFI as are other nations, including Japan and Canada. The size of the global PFI market is therefore set to increase strongly over the coming decades, and PFI is likely to become an established asset class for pension fund allocations.

Phil Chesters

1. PFI projects are long term, typically with a 25 to 30 year investment horizon, which makes them an obvious target for pension fund investment. However, there are two very distinct phases to a PFI project.
   The bidding and construction phase: characterised by relatively high risk and expected return, with investors typically looking for returns of around 15% a year. Investment in this phase can represent an attractive alternative to private equity investment.
   The operational phase: characterised by significantly lower risk and return expectations of around 10% a year. While such investment opportunities appear to represent very attractive alternatives to gilts and corporate bonds for matching pension liabilities, such returns are only available through very high financial gearing (typically around 90%).
   So, investors must be cautious. Without financial gearing, returns fall to around 6% to 7%, similar to the returns available from traditional long-lease properties with high quality tenants.
2. Provided the risks of any financial gearing are understood, operational or secondary phase PFI investment could be considered as part of a liability-driven investing approach. The attractions of wider infrastructure opportunities, including construction or primary phase investment, should also be considered alongside other alternative investments, in particular, private equity.
3. Of the available infrastructure opportunities, secondary investment in PFI projects offer the best liability match for pension schemes, in view of the largely government backed predetermined income. Because the risk involved can be significant, particularly with primary or construction phase investments, exposure to a wide a range of PFI projects within the scope of the mandate will be desirable.
4. If PFI investments are made for liability- matching purposes, there is clearly attraction in limiting investments to the UK. As a stand- alone alternative investment then a geographically diversified portfolio has attraction, although any political risk involved needs to be carefully considered.

Peter Eerdmans

1. Infrastructure investing in general offers alternative sources of returns which help to diversify the overall pension fund portfolio, as returns from infrastructure investing are lowly correlated with other return-seeking investments (such as equities). The immaturity of the market offers an advantage to first movers. That said, there are certainly issues that investors need to be aware of. These centre around political, regulatory, liquidity and operational risks, as well as the high costs associated with this type of investing.
2. Even though some types of infrastructure investing have some liability-like characteristics, we think the risks involved make this more of a stand-alone investment aimed to generate additional returns for the pension fund, rather than one to minimise risks associated with the liabilities.
3. Infrastructure investing is commonly split into two phases: primary infrastructure investing (start-up phase with higher risks and higher expected returns) and secondary infrastructure investing (operational phase, more stable income, lower risk). While primary infrastructure investing offers the highest potential gains, secondary infrastructure investing has somewhat more bond-like characteristics, often including a link to inflation and provision of long-term cash flows, while still offering attractive expected returns. It will depend on the specific pension fund requirements (such as maturity of the scheme, funding position and governance budget) which (if any) of the two options is most suitable.
4. Although growing, the UK PFI market is still very small and illiquid and with only a small number of credible fund managers operating in this area – the market won’t be yet able to accommodate a big flow of pension fund money. In addition to researching PFI fund managers, Watson Wyatt has also carried out substantial research into other infrastructure investments globally and the fund managers that offer these type of investments. We certainly see attractions in some of these areas, but note that these need to be reviewed on their merits as regulatory, investment and liquidity risks vary substantially across the different countries and opportunities.