The usual news about pensions is that they are becalmed in the doldrums waiting for a surge of public interest in retirement saving. This could take some time, which is why good news around group self-invested personal pensions (Sipps) is putting wind into the sails of employers.
What was a niche product is slipping speedily into mainstream occupational pension provision. Employers want it because it can be customised for all types of employees, offers pricing flexibility and can be integrated with other benefit packages such as share-save arrangements. Employees want it because it puts some control back into their hands. But the rapid shift from specialist to mass product is raising questions about safety.
The National Association of Pension Funds has commented in the past on what it regards as a governance vacuum around contract defined contribution, which includes group Sipp. It is true that group Sipp doesn’t have the 25-year old governance history of trust-based arrangements, but to say it has nothing is myopic. Meeting the Financial Services Authority’s treating customers fairly (TFC) requirements, for instance, replicates much of the Myners’ recommendations used in trust-based governance (see chart below). Governance may seem like a ‘bucket of bits’ but the right components are in there; putting the bits together into a framework is not that hard a task.
The rules of most remuneration and compensation committees require that the holding of share options – a necessity for senior personnel of companies quoted in the FTSE and AIM indices – must be directly connected to employees. This means that bonuses are often split partly into cash and partly into company shares.
It is now a realistic option to put shares and share options into a group Sipp. This adds valuable income tax relief to the value of the shares and in many respects enables getting the income tax paid on these shares back. Future growth is exempted from capital gains tax and the overall value falls out with the employee’s estate for inheritance tax calculation purposes.
It is great that these types of transactions can now take place, but it also illustrates just how adaptive governance needs to be, and will for some years, as employers ensure their governance framework covers the evolution of group Sipp. They may want, for example, to place a restriction on the proportion of company shares an employee can hold within their sponsored pension arrangement. Understandable given experiences in the US with Enron.
What is important is that group Sipp, and pension schemes in general, continue to evolve and become more sophisticated. Much is said about the complexity of pensions and the reluctance of employees to make decisions about them, but group Sipp is proving that people can make good economic decisions for themselves.
Consider the following examples of two companies with share-save arrangements. At the time shares in company A matured, its share price was at an all-time high (clearly a few months back), and many employees decided to sell to take profits and not invest shares into the group Sipp. In company B things weren’t going so well; when its share-save scheme matured the share price was significantly lower than it had been. A large number of employees in company B did choose to transfer the shares to their group Sipp and are holding on to the shares until the price rises again in future. Group Sipp provides a tax-efficient environment for employees to benefit in the future growth of their company.
The extra choices inherent in group Sipp follow through to the decumulation phase when a variety of strategies are available:
- members can continue to hold company shares and other self-invested assets in their pension scheme after their retirement date;
- if employees want to move to less risky investments, such as pooled investments, they can do so;
- partial drawdown is possible, as are more sophisticated processes such as drip-feed drawdown;
- for employees who want to move past age 75 without purchasing an annuity, alternatively secured pensions are possible.
The existence of significant legacy benefits will demand that existing trust-based infrastructures are retained by many large employers, but this should not preclude group Sipp being used to enhance and complement these trust-based arrangements.
The infrastructure for robust governance within the group Sipp contract environment is also in place, and both arrangements can be run and governed simultaneously without too much diversification in approaches.
When making sure that people are protected we shouldn’t be afraid to give them choice: that’s what most people expect.
