SSAS-related scams are better tackled by tightening the rules on transfers and single-member schemes, pension commentators tell Emily Perryman.
The pensions industry has reacted angrily to a proposal by The Pensions Regulator (TPA) to ban small self-administered schemes (SSAS), arguing the move will be detrimental to a niche yet significant portion of consumers.
The proposal by TPA executive director Andrew Warwick-Thompson is part of a package of reforms that aims to crack down on pension scams (see Fig 1, below).
He said the government should consider an outright ban on the establishment of any more SSAS arrangements, describing them as an “open goal” for scammers. He also urged a ban on transfers to SSAS.
SSAS have become a lot less popular over the past 20 years as a result of a clampdown on the assets that can be held in them and the growth of the self-invested personal pension (SIPP) market.
There are roughly 800,000 SSAS in the country and about 750,000 only have one member. According to William Annison, director at employee benefits consultants HWWA Consulting, the decline in the use of SSAS arrangements meant they were off the regulator’s radar for many years.
The requirement to have an independent trustee was dropped several years ago, and it is only SSAS with two or more members that have to register with the regulator. SIPPs are subject to far tougher regulation.
“SSAS are only really used by wealthy business owners, so the level of concern by the regulator was not as great as for other areas of the industry. Because of this lack of regulation, it has been simple for scammers to fraudulently set up schemes. It is easy for the scheme to look legitimate if there are no regulatory checks,” said Annison.
It is perhaps no surprise that the TPA has considered scrapping SSAS, given the proliferation of scams and the fact they are only used by a wealthy, niche sector of society. But many experts have said a ban would be overly harsh given that SSAS are an important pension planning tool for some consumers (see Figs 2 and 3, below).
Nigel Bennett, sales and marketing director at SIPP and SSAS provider InvestAcc, said SSAS remains an extremely effective retirement planning vehicle when used correctly.
The most obvious benefit of an SSAS for business owners is the ability of the pension scheme to make a secure loan back to the business. Regulations are written in such a way that these loans should have very little risk due to the security provided.
He added: “Also, as SSAS funds are pooled in nature, a multi-member scheme can gain economies of scale and they can be very effective for family or small businesses where assets such as property may remain invested for the benefit of more than one generation.”
A survey of 48 advisers who attended the recent Dentons Annual Seminar in London found 98% thought SSAS should not be banned altogether. Instead, they said tighter controls should be introduced (see Fig 4, bottom).
Bennett described the proposed outright ban on SSAS as a “knee-jerk and completely unnecessary step”, while DP Pensions director Elaine Turtle said it would be like “using a hammer to crack a nut”.
“If they were banned, the people who are using them genuinely will be affected more than the scammers, who will just find another route to scam people,” Turtle added.
Zachary Gallagher, chairman of the Association of Member-Directed Pension Schemes, suggested Warwick-Thompson had misjudged what a SSAS is and may have assumed a small number of large pension schemes would be easier to regulate.
He argued: “A SSAS is just a pension scheme with a small number of members (fewer than 12), whose members choose the investments. They have survived 40 years of governmental obsession with changes to pension legislation for a very good reason: they are simple and they are popular. We fear that Warwick-Thompson has mistaken this simplicity for weakness.”
Gallagher said he is concerned that people in the industry who do not understand SSAS, or do not have experience of what the trustees might want to invest in, dismiss what they do not recognise and damn is as “probably a scam”.
He said: “Our members have seen it in the high-handed way that some transfer requests from legitimate schemes to equally legitimate schemes are summarily rejected. Of course, it is possible for someone to sleepwalk into an investment scam via a SSAS.
“But the time that it takes to establish a SSAS, and the qualifying conditions for doing so, should give adequate opportunity for reflection and for taking advice.
“The industry might be more concerned by larger schemes whose members have no say in the investments, where scammers might limit those schemes’ membership numbers in a way which places them outside of protective provisions relating to investments.”
Although an outright ban is not in favour, there is recognition that the SSAS industry needs to change. Gallagher said the industry needs to learn from its past, as 15 years ago there was a strong system in place with recognised pension trustees and strict conditions over who could set up a scheme.
“We had a requirement that pensioner trustees co-owned SSAS assets and jointly controlled its bank account. We did not talk about pension scams in those days. We cannot return to the past, but we need to learn from it, recognise what has gone wrong and put it right,” he added.
Most people in the industry have suggested the exemptions for one-member schemes be removed, thereby ensuring they are regulated.
Bennett said establishing and operating a SSAS could become a regulated activity in the same way as it is for SIPPs.
“This would allow a regulator (such as the FCA) to control persons involved and to remove authorisation rapidly with consequences for those having their permissions withdrawn,”
It has also been proposed that SSAS have an independent trustee and that the rules around transfers are tightened. Annison said: “There should be an independent person who has to sign off on the transfer and verify that it is not a scam.”
Whatever the next steps are, the industry is hopeful that the actions of a few scammers will not penalise people who are using SSAS in good faith.
Ian Tait, CIO at pension administration software firm Delta Financial Systems, asked: “Is it right to tear down the benefits of SSAS for everyone because of a lack of regulation, or should the environment be regulated?
“The biggest problems are that some firms are not regulated and some of the underlying assets have very complicated structures, but the latter applies equally to SIPP schemes as it does to SSAS.”