As SIPPs celebrate their 20th birthday John Moret assesses how he thinks the market will develop
March 2009 was a significant milestone for the SIPP market. Not only did it mark the twentieth anniversary of the conception of SIPPs but it also saw confirmation that there were now more than half a million SIPPs being used in the UK. More of that milestone later but first, let us have a quick look back at the evolution and development of SIPPs, as it may provide some clues to the future prospects for this market.
The architect of SIPPs was Nigel Lawson, who as Chancellor announced his intention to widen the scope of investments allowed for personal pensions in his 1989 budget speech - just nine months after the launch of personal pensions. The announcement took just about everyone by surprise including most of his Treasury officials and it was seven months before any more details emerged in the form of a short memorandum from the Inland Revenue - memo 101 as it became known. That was just about the only guidance issued on the subject for the next ten years!
Initial interest in SIPPs was minimal. To this day there remains some uncertainty over which provider launched the first SIPP. What we do know is that the five founding members of the 'unofficial' SIPP Provider Group were in alphabetical order; Personal Pension Management (PPML - now Capita SIP Services), Pointon York, Provident Life (now Winterthur - part of Axa), Rathbones and Sun Life (now part of Axa).
Catalyst for growth
It was the introduction of income drawdown in 1995 that really acted as the catalyst for growth in the SIPP market. Income drawdown came about largely as a result of the activities of two companies - Equitable Life and Winterthur Life who in 1993 unsuccessfully tried to launch managed/flexible annuities that allowed for a wider range of investments and income flexibility. That led to immense pressure on the Conservative Government who responded by introducing income drawdown as an alternative to purchasing an annuity. What soon became clear was that the use of drawdown required an investment strategy which was unlikely to be satisfied by the use of a traditional personal pension product - SIPPs were seen as the ideal vehicle - and of course discretionary investment managers in particular were keen to encourage the use of SIPPs.
During the mid to late nineties we saw a second wave of entrants to the SIPP market including AJ Bell, James Hay, Scottish Equitable (now Aegon) and Suffolk Life. It was not until 2006 that the personal pension legislation was amended to allow any regulated organisation to operate a personal pension or SIPP. Prior to that date, to be a provider you needed to be a bank, building society, life company or unit trust. This led to a whole range of different alliances being forged to enable organisations to operate in this market without actually being the provider. These alliances usually involved a bank and a 'tame' trustee.
In 2001, more prescriptive legislation for SIPPs was introduced reflecting the Revenue's strong dislike for a discretionary regime which involved them in having to consider a growing number of investments at the fringes of what they considered allowable. By this time, the number of SIPPs had reached over 60,000. The demise of Equitable Life led to a further surge in new SIPP business and that was followed by the launch of Hargreaves Lansdown direct to customer SIPPs and a third wave of new entrants as platforms started to have a bigger influence on the SIPP market.
Pensions simplification in 2006 brought with it some further growth drivers - notably higher allowable levels of contributions and true concurrency - along of course with a new taxable property regime which effectively excluded - at the last minute - residential property. New regimes and labels for drawdown emerged - with much confusion over the position post age 75. And in 2007, the FSA finally got round to regulating the operation of SIPPs - although the regulatory regime continues to give rise to anomalies and fails to fully recognise and distinguish between the different types of SIPP that have emerged over the years.
Today there are probably over half a million SIPPs using data collected from a range of trade magazine surveys. The graph (below) shows the consistent pattern of growth over all three segments of the market since 1996. It is a remarkable success story but what lessons can we learn that might help assess the likely fortunes for the future?
Retirement options. It is clear that the growth in SIPPs has been fuelled by developments in the retirement options market. Improving longevity and tax changes are likely eventually to force a change in the current 'age 75' restrictions. This in turn is likely to lead to the lifetime of the average SIPP being extended - giving a further boost to the market.
The development of platforms. These will have a growing influence over the individual retirement savings market and most SIPPs, other than the true bespoke propositions, will be delivered via this route.
Consolidation of operators. The regulatory overhead and pressure on costs, coupled with the platform developments, will lead to consolidation. There are at least 70 bespoke SIPP providers operating today -over time I would expect that number to at least halve.
Service issues. There have been some notable failures of service delivery - mainly by providers with inadequate technology to support the operational complexities of truly flexible and bespoke SIPPs. I expect to see more failures as margins tighten.
Demise of occupational schemes. This looks likely to continue - particularly DB schemes. The loss of the security of final salary pensions may be regrettable but it will lead to more demand for SIPPs through transfers and possibly the development of more direct to consumer SIPP propositions. Quite what impact personal accounts will have - if they materialise - is difficult to predict. This will have a bearing on the emergence of worksite based SIPPs.
Inevitably future development in the SIPP market will also be influenced by macro factors such as the speed of recovery of the economy, the election result and the impact of European legislation.
However my sense is that while it has taken 20 years to reach half a million SIPPs, it may only take around another five years for the million SIPPs milestone to be reached.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress