Open-ended funds, such as OEICs and unit trusts are hugely popular with self-invested personal pension (SIPP) investors due to their simple structure.

They can offer a great means of gaining exposure to asset classes that would otherwise be inaccessible or too expensive for some investors. An OEIC’s underlying legal structure is a company, though they differ from conventional companies because they are not established under the Companies Act but under the OEIC Regulations. This permits them to have share capital that can expand and contract to satisfy investor demand.

Many have a feel-good factor as they direct cash to projects helping the wider economy by providing jobs and stimulating long-term economic growth. OEICs may seem to have more kerb appeal because investors feel as though they have an escape route but in reality are they really open-ended?

Underlying assets

In normal market conditions OEICs are typically viewed as being liquid investments. However, much depends on the underlying assets of the OEIC, and whether they can be liquidated in sufficient time to meet dealing timeframes. The issues with Neil Woodford’s funds have recently highlighted to many savers, potentially for the first time, that investing comes not only with the risk of investment loss, but liquidity risk. It serves as a reminder of the risks involved in investing in funds containing illiquid assets and the difficulty investors might face if they expect to withdraw their money quickly at short notice.

A key example hit the headlines in summer 2016 surrounding the suspension of several UK open-ended property funds, causing the Financial Conduct Authority (FCA) to consult on the matter. Supporters for the open-ended structure say the suspensions show the system to be working as it should. But in the run up to Brexit can the sector cope with another round of suspensions and what does this mean for pension scheme members?

‘Possible casualties’

There are a few possible casualties when we consider suspended investments held within pension schemes; the first being those who want to transfer to another pension provider, maybe to obtain better fees or service. These clients may find themselves unable to transfer, particularly if they have commenced drawdown as the rules do not normally allow you to split the drawdown element. As a result, they could be stranded between two providers incurring two sets of fees or forced to cancel the transfer all together.

Furthermore, other tasks such as taking benefits or processing a pension sharing order upon divorce may prove to be a challenge if a client cannot readily access their own pension funds. Even the distribution of death benefits to a beneficiary could be impeded, this could be extremely problematic at a time of distress when liquidity may be important. All of which can make administering the pension more difficult, time consuming and potentially more costly for the client.

While there’s a risk of disruption for months or even years after we are due to leave the EU on 31 October, in the meantime, it may be sensible for clients and advisers to review SIPP portfolios with one eye on the liquidity risk to ensure they are as prepared as they can be for the uncertainties that may lie ahead.

Danielle Byrne is technical consultant at AJ Bell