Unregulated investments, traditionally a by-word for highly risky products, should be allowed to have a place within long-term pension planning in self-invested personal pensions, according to an industry consultancy.
Sipp providers and advisers have become extremely wary of what the regulator terms ‘non-mainstream’ assets, after a serious of high-profile problems for unregulated investments such as Harlequin, Connaught and Stirling Mortimer.
The compensation paid to investors via the Financial Services Compensation Scheme who were holding their pensions in Sipps went up by 35 per cent to £105m in 2016/17.
The FSCS’s annual report said of the Sipp-related claims increase: “These investments are often high risk and unsuitable for most investors. Their riskiness means some investments inevitably fail and become illiquid.
“This trend began two years ago and has continued this year, with claims against an increasing number of failed life and pensions advisers.”
But speaking today at a conference on Sipps, Chris Jones, founder and principal of the Rock Consultancy, said investing in pensions means “tying up capital for a decent period of time”.
Due to this reason, the traditional Sipp market should be allowed to commit funds to “good quality investments which are not in the regulated regime”.
He said: “There are plenty of unregulated funds which are good quality funds, but that are not regulated in the UK or do not meet the liquidity requirements.”
Since 2006, there is only one set of investment standards for all registered pension schemes, including Sipps, which is set by the HM Revenue & Customs.
These schemes are not allowed to invest in tangible assets, or to make investments which by definition will depreciate in value, such as short hold leases.
Assets that the member, or anyone connected to the member, will financially benefit from are also prohibited. For example, HMRC does not allow investments in residential property even if on a buy-to-let basis.
More recently the Financial Conduct Authority has demanded Sipp providers who hold investments in non-standard assets for scheme members hold significantly more capital to protect the company against their failure.
This has deterred many providers from allowing pension savers to invest in unregulated or more esoteric investments via their platform.
Earlier in the morning, John Moret, the principal at advice firm MoretoSipps, said that the Sipp market is expected to grow to £350bn by 2020.
However, the number of providers, currently at 71, is expected to be reduced to 50, at the expense of smaller non-platform/non-life company Sipp providers who administer between 1,500 and 3,000 pensions.
Last year, Mr Jones argued that failing Sipp providers should be gathered into a form of ‘bad bank’ style solution to protect clients against toxic investments.