Pensions: the self-administered option

With a high degree of control over investment decisions as well as the ability to borrow to invest in assets such as residential properties, self-administered pension schemes (SSAPs) have been the favoured option of many high net worth individuals over the years.

Yet the recent introduction of IORP II will prevent these schemes from borrowing and impose a very high compliance burden on them. This begs the question, what will happen to existing SSAPs and does the model even have a future?

According to Joe Hanrahan, head of retirement planning with Brewin Dolphin, SSAPs are "badly affected" by IORP because they traditionally provided an outlet for members to invest in "unregulated" investments.

“This generally meant property, as property is not a regulated activity,” he explains. “Single member schemes were, until April this year, allowed to borrow for the purposes of property investment, which, given the Irish psyche, was always an attractive proposition.”

Under the new rules, borrowing is now proscribed and investments in schemes will need to be predominantly on regulated markets. “Predominantly is taken to mean greater than 50 per cent. This means pension schemes will need to be properly diversified and avoid ‘concentration risk’. Trustees will therefore need to be vigilant for breaches to the Pensions Act arising from growth in the value of unregulated assets in a client’s pension portfolio,” Hanrahan notes.

“In addition, trustees are likely to require qualifications to act as trustees and we are likely to see an end to employers acting as trustees given the proposed more onerous requirements,” he adds.

With this imposition of more enhanced governance and oversight rules, the likelihood is that SSAPs will become more expensive – perhaps prohibitively so – as SSAP providers will face more significant obligations. These costs will be passed on to savers. “This means we are likely to see migration from SSAPs to other pension vehicles which are not subject to new IORP II rules and which will potentially facilitate property purchase and borrowing, albeit indirectly,” says Hanrahan.

He also points out that the majority of the existing SSAP assets are held in cash – this presents a problem given the current adverse interest rate environment.

“This money is generally held in this form pending investment in more esoteric investments and property and, as these are unlikely to be feasible going forward, the big winners in this space are likely to be asset managers whose sole focus is on investing in traditional stocks/share and other regulated securities,” Hanrahan says.

James Campbell, Head of Legal Consulting, Mercer agrees that the impact on the SSAP market of the IORP II requirements could be "significant".

“All SSAPs are subject to the full range of IORP II obligations in the same way as any other private occupational pension scheme, although there is some leeway for any SSAP which is a one-member arrangement, which do not have to comply until 2026,” he explains.

“Clearly, the attractiveness of a SSAP for many was in their being allowed to borrow, and also to invest all (or the majority of the fund) directly in residential or commercial property. Those options have now been removed. Without these features, and taking into account the burden of having to meet a much higher bar in terms of regulatory compliance, it is difficult to see how the SSAP market will remain a popular retirement savings product going forward,” Campbell admits.

As a result, limited numbers of new SSAPs will be established in the coming months and years, he says. “We would anticipate that the market for more autonomous pension saving and more flexible financial planning will shift to self-invested. Existing SSAPs can continue until normal retirement age, but we would anticipate that the cost of meeting IORP II compliance requirements could be prohibitive, and individuals may then decide to wind up their SSAP and transfer existing assets to either a self-invested PRSA or a Personal Retirement Bond.”