The Financial Ombudsman Service recently published its latest complaints data, showing a spike in complaints relating to personal pensions and self-invested personal pensions (SIPP).
Many of those related to customer service and suitability could have been created by the pandemic and its wide-reaching effects. However, reading about pension complaints and suitability always brings to mind the importance of advisers completing thorough due diligence on their chosen providers, which we believe falls into a number of key areas.
This will often be one of the first things that comes to mind when people think of due diligence, and for good reason. The financial strength and size of a firm will give a good indication of its ability to withstand changes in the market and whether it is likely to be around for the long term. Key indicators such as a firm’s capital adequacy position should be readily available for advisers.
Investment in the business
Leading on from financial strength, advisers should also be considering whether the pension provider is investing in its business. Things don’t stand still in pensions for long, and it’s important that firms strive to adapt to changes within the market and in line with changing expectations in order to remain competitive.
The SIPP market is still suffering from the legacy of firms that allowed clients to invest in assets which were at best unsuitable for pension investment, and at worse, outright scams. Nowadays you’re more likely to find products which arguably go too far the other way, and leave the investment choices not much wider than that of a normal personal pension. There are still many clients who will want to hold more unusual investments and for whom that is a suitable decision.
Clients in this position should carefully consider their chosen provider’s approach to such investments. If the provider would allow the client’s proposed investment because they allow any investments without question, this should raise red flags – even if the client’s particular investment is fine, they could be at risk with a provider that may be holding large volumes of ‘bad’ investments.
Clients should seek providers with thorough due diligence processes that filter out scams and investments generally unsuitable for pensions.
In most cases it’s preferable for clients to need to transfer their pensions as infrequently as possible. For that to be achievable, the chosen pension needs to be flexible enough to cater for a client’s changing requirements as their retirement plans progress and come to fruition.
Advisers should be asking whether their chosen provider offers all the flexibility their clients might need in terms of contribution processes, investment options, retirement choices, and even death benefits. They should also consider how quickly the provider has been able to adopt major rule changes, such as the pension freedoms.
In recent years many more products have come to be marketed as SIPPs, including what the Financial Conduct Authority has come to term ‘mass-market SIPPs’. Typically, such products are using the SIPP name as a way of showing potential customers that they offer the flexible retirement options afforded by the pension freedoms.
However, they might not offer other forms of flexibility normally associated with SIPPs – especially when it comes to investment choice. Independent providers that focus solely on pension administration and aren’t tied to particular investment firms or solutions are still best placed to offer a fully flexible SIPP experience.
The idea of the 2006 rule changes creating pension ‘simplification’ is one of the longest-running jokes in the industry. With 14 years of rule changes being layered onto each other, it’s very common for clients to have some element of their pension arrangements which doesn’t quite fit the standard rules.
Perhaps they’re subject to one of the annual allowance variations, hold lifetime allowance protection, or have unusual tax free cash entitlement. Perhaps they still have a protected pension age, or their savings came from a pension sharing order.
Perhaps some of their benefits have been inherited from another pension.
Whatever the case may be, it’s important for providers to understand and be able to administer these endless variations, and support clients and advisers through the twists and turns of the rules.
Culture, CSR, and ESG
For years the Financial Conduct Authority has emphasised the important role that culture plays in promoting good practices within financial services firms. There’s much more to look out for than a good set of company values, however.
A firm’s corporate social responsibility practices can say a lot about its commitment to making a positive difference for charities, the environment, and its local community. Advisers may also wish to consider providers’ approach to ESG; whether within their own practices or in terms of facilitating appropriate investments.
Due diligence is still a frequently discussed topic around the industry and for good reason – it’s a vital part of helping clients to make the most out of their pension savings and fulfil their retirement plans.
Jessica List is pension technical manager at Curtis Banks