SIPPS revisited: the story behind the levy

FSCS is today announcing a supplementary levy on life and pensions intermediaries for what remains of 2014-15 1.  We are asking for an extra £20m to meet claims arising from the mis-selling of SIPPs.

Though we did forewarn in our Plan and Budget in January that a supplementary levy might be needed this year, I fully recognise that demands for money outside the annual levy cycle are never easy for firms.  This one will be no exception.

It is, however, inherent in a pay-as-you-go funding arrangement such as ours that FSCS will sometimes have to come back to ask for more.

We do not have 20/20 vision.

We do not always have sight of firm failures in the year ahead when we set the levy.  We cannot always predict the volume and size of claims arising from failures we do know about. And there can always be new legal or regulatory developments with implications for FSCS’ judgement about the eligibility of claims and the quantification of losses.

The supplementary levy we are announcing today illustrates exactly these uncertainties.

We were, of course, fully alert to the mis-selling of SIPPs. 

These are distressing cases.  They involve people with modest retirement savings being advised to transfer those savings from occupational schemes into SIPPs.  Typically, the victim – I use the word advisedly – is then persuaded to invest within the SIPP in very risky and illiquid assets.  Overseas property development is a good example.

Many people have seen their retirement savings swallowed up in this way, with very uncertain prospect of retrieving any value.

FSCS exists precisely to protect consumers like these who are given bad advice and who cannot get redress because their advisory firm has failed.

We have not only seen higher volumes of these claims.  We also received earlier this year legal advice which opened the way to us compensating claimants not just for lost pension growth, but also for the lost value of their investments.

You can find the announcement on our website.

It’s primarily the cost of compensating claimants for the loss of their investments which is now driving this supplementary levy.

(Of course, we could avoid the need for supplementary levies by moving to pre-fund FSCS through regular fixed contributions, but this would mean FSCS holding industry capital - in the shape of a pre-fund - in advance of need.)

So there are immediate funding consequences as a result of these SIPP claims. 

Perhaps too there are also cautionary lessons for the future as we approach pension liberalisation in April.

The people we are compensating now were not reckless or happy-go-lucky.  They simply wanted to make modest retirement savings go further and got very bad advice about how to achieve that.

There will be many more people from April who also want to maximise the income generated by their retirement savings.  It is critically important that these people receive guidance not only about the options open to them, but also about FSCS protection of the different products they might choose.

That is why FSCS is working closely with the providers of the Pension Wise service – The Pension Advisory Service, Citizen’s Advice and HM Treasury – to ensure people understand FSCS protection.

I would much prefer that people did not need FSCS’ help because they fully understand the options and invest their money prudently.  But, as the SIPPS claims illustrate, we are not yet living in the best of all possible worlds and FSCS continues to provide a vital safety net.





[1] I should perhaps explain that FSCS’ levy year in effect runs from 1 July to 30 June.  That’s because the levy we announce every spring does not reach us until the summer.  So we raise in the annual levy sufficient resources to meet the compensation costs we expect to incur to the end of June.