August 2007

Growing pains

Many independent financial advisers have enjoyed the surge in the popularity of self-invested pension plans (SIPPs) over the last few years.

Driven by a range of factors, from disenchantment with traditional pensions to the more liberal contribution rules from A-Day, the SIPP market has grown by 20-25% annually in recent years. Estimates and market research now put the total number of SIPPs at around 250,000 with around £30bn in assets; what was once a niche market is rapidly entering the mainstream and SIPP regulation is helping in this. Further growth can also be expected, as SIPPs are still scratching at the surface of mass affluent wealth and existing pension funds.

But a detailed examination of the views of UK mass affluent consumers by CoreData Research, a specialist research firm in the financial services field, has detected differences of opinion between consumers and advisers on some aspects of SIPPs. In an online survey, CoreData gathered the views of over 1,000 consumers and over 200 advisers for a forthcoming SIPP market report. Now it may be that some of the findings are evidence of natural growing pains in a booming market. At the same time, it appears that some advisers are underestimating what clients want from their SIPPs.

SIPP performance

Firstly though, here is the good news. This is that the mass affluent consumers - classed as those with between £20,000 and £250,000 to invest - are generally happy with the performance of their SIPPs. Just over one-third were very pleased and stated that their SIPP's performance had been very good, while 39% said they were quite pleased, as performance had been reasonable. This largely concurs with the views of advisers, 84% of whom rated their clients as satisfied with their investment performance.

Independent financial advisers (IFAs) were also seen as the best source of advice on SIPPs both by those with no pension and those with a pension other than a SIPP. For those with a SIPP, its recommendation by an IFA was given as a reason for purchase by 43% consumers questioned.

Against this, strong evidence emerged of media coverage driving the purchase of SIPPs. Around 75% of the mass affluent sample said reading about SIPPs in the press or online influenced them to take out a SIPP. This is undoubtedly due to the favourable publicity SIPPs have enjoyed in the run-up to A-day and since. As leading SIPP experts put it, advisers and providers got the best of both worlds with the frenzy over the idea of holding residential property in a SIPP creating welcome publicity for providers, while the u-turn prior to A-Day forestalled the hassles of actually holding peoples' homes in a pension.

What is a SIPP?

Since then, positive media coverage has continued, although there must be a question over what is actually a SIPP. Many IFAs would contend only a full SIPP should be described as such and that products with a limited range of investments should not be called a SIPP. One financial planner commented: "A SIPP should be able to invest in anything permitted under HMRC regulations. A lot of people might say they are using a SIPP, but they aren't."

One consequence of this is the current debate on whether SIPPs, or rather pseudo-SIPPs, are being over-sold to investors. While pensions professionals may use terms like budget SIPPs, hybrid SIPPs or full SIPPs, the public at large generally see them as a single type of pension, which is understandable given the complexity of UK pensions. It could be argued, therefore, that greater clarity is needed over what customers are being sold, be it a pension wrapper with a fund platform or a bespoke vehicle for investment and tax planning.

Another financial planner CoreData interviewed said: "The term SIPP is completely mis-used - branded products are frequently not SIPPs at all. Anything with a lock-in to in-house funds is not a SIPP; it is a glorified personal pension. It would be nice if the FSA or HMRC could come up with a proper definition as to what is meant by a SIPP, as most of them aren't."

The argument over what constitutes a SIPP and how different products should be labelled is an issue for providers and advisers alike, but CoreData also found signs of a disconnect between adviser and customer views on investment performance.

Asked what was the most important factor behind the investment performance of their fund, 43% of consumers put general investing conditions first, ahead of investment manager performance (20%), my (i.e. the consumer's) input into investment performance (19%) and a tailored investment strategy (17%). Only 1.4% thought the views of their adviser were the most important factor.

When asked what were the most important factors in deciding on their SIPP's investment strategy, nearly 70% of clients put their own research and investment views first, compared to 21% for their financial adviser's investment views, or the views of an investment expert, such as a stockbroker (7%).

Furthermore, when consumers were asked to give their level of agreement to a series of statements about SIPPs, only 48% of consumers agreed that their adviser used the latest investment ideas, with 52% saying their adviser did a good job in managing their investments. In contrast, 83% said they felt in control of their SIPP investments and 88% said they could understand the information they received about their investments.

Different point of view

Another possible sign of how the SIPP market could be moving away from advisers is in different perceptions of pensions between advisers and consumers. When asked how they see pensions, both consumers and advisers agreed that they were important for retirement saving. However, advisers gave a much higher rating for the statement that pensions were not something their clients were excited by. Consumers were more likely to say that pensions were a vital part of their retirement planning. So perhaps advisers don't give SIPP consumers enough credit for taking an interest in their pensions.

However, both groups agree that major obstacles to making pensions more attractive are the rules over passing on pension assets and taking benefits. For both consumers and advisers, 'the ability of pass on pension assets to dependents' and 'more flexibility over when and how benefits are taken' were in the top three of what would make pensions more attractive.

For advisers, the third element was 'less political interference from government', while for consumers it was 'better tax incentives to save'. It is also interesting to note that cheaper and simpler pensions were not considered particularly important in making pensions more attractive, while consumers gave cost and simplicity a higher rating.

Another area where consumer and adviser views were compared was on possible new investments for SIPPs. Both groups were asked how much they knew about hedge funds, absolute return funds, real estate investment trusts (REITs), property syndicates, commodity funds, structured products and exchange traded funds (ETFs), and how good they would be as investments within a SIPP.

For consumers, the investment with the highest score for those saying they knew a lot about it was for ETFs, with 17%, compared to single figure scores for the other investments. However, 53% of consumers said they knew a moderate amount about REITs and 37% said they knew a moderate amount about hedge funds.

In terms of attractiveness, consumers gave the highest score to REITs, ahead of ETFs, commodity funds and property syndicates. For advisers, the most attractive investments were also REITs, ahead of absolute return funds and with ETFs in last place.

Considering REITs were only launched in January this year, it is interesting to see them scoring highly here. The findings also pre-date the latest jitters in the commercial property pooled fund sector.

Other findings from CoreData's work are that advisers see administration and service as the key for SIPP providers, both for potential new entrants and existing players. When asked about market trends, the investment of protected rights, the use of SIPPs as part of a wrap account and more focus on SIPP costs and charges were all seen as significant trends by advisers.

Overall then, these findings provide an insight into how advisers and consumers view SIPPs. The differences show that on investment, for example, some advisers may need to work harder to show that they are adding value if they are to keep their clients satisfied.

Matthew Craig
Freelance Journalist and UK Head
CoreData Research