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Temptation that can kill

Updated: Nov 30, 2022

This week sees another firm being brought to its knees by the poorly understood consequences of permitting non standard investments (NSIs) to form part of pension portfolios.

Avalon SIPP

Avalon SIPP, which took in pension transfers and placed them in high risk NSIs, was declared in default by the FSCS this week. The FSCS commented "did Avalon do certain checks on the non-standard investments that would hold its customers' pension funds, before accepting them into its SIPP investment portfolio? Did it make sure they were appropriate for a SIPP, and did it identify any potential issues with them?" This raises an extra question for SIPP providers about their responsibility for new investments in SIPPs over and above those made at inception.

It’s easy to see why firms such as Avalon were tempted to boost their apparent client returns with NSIs: after all, the rationale of a self-invested pension is to go outside the ‘stuffed shirts’ rules of what you are allowed or not allowed to invest in. George Osborne's pension freedoms added further encouragement to pension savers to stick two fingers up at the established order.

Freedom vs greed

But unbridled temptation can be a recipe for disaster, as proved to be the case for Avalon. All SIPPs are regulated pension schemes, and investments need to be suitable for that purpose: being trendy or attractively sexy isn’t enough. At Telos we've seen both good and bad practice in striking the balance between healthy freedom and unthinking greed.

A SIPP firm must rely on its initial due diligence: but as more subtle esoteric investments evolve, ongoing scrutiny is just as important. A question we like to ask is: how often should you look at the potential liabilities in your clients funds?

Dolphin Trust

On top of all that this week, another property fund has become illiquid: do you have this one in your client's SIPPs?

Dolphin Trust investment scheme (now known as German Property Group) which went into default in the UK at the end of last year, froze payments indefinitely to 1,800 Irish retail investors creating a new illiquid fund for SIPP firms and their clients to wrestle with. Although the Irish structure appears to differ from that invested in by UK members both were offered as an investment in secured loans offering 15% coupon over 5 years to ultimately fund the high spec redevelopment of German municipal properties. Even though the above average returns should have triggered some scepticism, it goes to show that an environment where these risks have been eradicated is a long way off and there is no time for enlightened firms to waste in getting a grip to on managing these liabilities.

One SIPP firm has been brought down by ill-disciplined NSI investments, and many others are affected by fund illiquidity. Temptation can kill, while a healthy dose of sobriety is often the most profitable course of action!


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