In the early weeks of what may become known as the ‘first lockdown’, The Pensions Regulator (TPR) put out its ‘DC Trust: scheme return data 2019-20′. It provides the latest snapshot for the health of the occupational pensions world. As such, it’s always worthy of a read.
However, this time around we decided to comb the TPR’s annual report to look at an under-reported segment of the trust-based occupational pensions world: small self-administered scheme (SSAS) pensions, now described as relevant small schemes (RSS) and reported within the TPR’s ‘micro schemes’ round-up.
Of all 27,760 micro schemes, those with fewer than 12 members, registered with and regulated by the TPR, 21,860 of them identified themselves as SSASs. A total of 61,000 members are recorded to be in these SSASs meaning that each SSAS has an average of 2.79 members in it.
SSAS schemes are typically used by owner-managed businesses and are created under a trust with fewer than 12 members. Most but not all are DC schemes. They are often seen as the poor relation of self-invested personal pensions (SIPP), but their all-round flexibility, cost-effectiveness and tax benefits make them an ideal pension vehicle for director-controlled firms.
They are a popular choice among directors who want more control over the investment decisions relating to their pensions and the opportunity to unlock capital from their scheme to invest in the business. A SSAS can lend to a sponsoring employer, whereas a SIPP can only lend to un-connected parties.
Demand spike
Rules allow those in a SSAS to borrow money for investments such as buying the company’s premises or land. This property can then be leased back to the company. SSAS’ ‘loanback’ capability, as it’s often referred to, helped to create a significant spike in demand for SSASs as lockdown began and directors explored all routes to accessing capital to help them through the pandemic.
Debt can be such a fickle friend – at the time when you most need to borrow, others can be most reluctant to lend to you!
A word of warning: HM Revenue & Customs’ rules state loans made to the sponsoring employer of a SSAS scheme only qualifies as an authorised payment if several tests are met.
The key rules are:
- The loan must have a maximum term of five years
- Interest rates must be at least one per cent above the current bank base rate
- It cannot be for more than 50 per cent of the SSASs total net assets.
If trustees do not document a loanback properly and if the correct securities are not in place, the loan does not qualify as a loan and instead becomes an unauthorised payment on which tax charges apply. To ensure clients don’t trip over their bootlaces, most SSAS providers have a strong in-house technical team.
SSAS members may raise a mortgage to assist with the purchase of the company’s premises by the scheme and the mortgage repayments can then be covered, in all or in part, by the rental income that the company pays the SSAS.
All of the SSAS’ assets are held in the name of the trustees. There are no ‘individual pots’ for each member, although each member is deemed to hold a proportion of the scheme’s assets. Investment returns made in a SSAS are free of income and capital gains taxes, and contributions receive income tax relief.
Traditionally, SSAS members have tended to invest cautiously. As such, they tend to hold much more cash than normal DC pensions. Our view on this is that owner-managers and their partners are taking relatively high risk decision of running their own businesses. A lot can go wrong, particularly in times like these, so fund selections tend to be highly cautious.
Regulation, because they are micro schemes, is relatively ‘light touch’ and although they are trust-based schemes the trustees don’t have to be independent. The need for SSASs to have an independent professional trustee to manage the pension scheme fell away as part of A Day ‘pension simplification’ changes in April 2006.
SSASs have enjoyed something of a boom since then, as SSAS gained greater attention as reporting requirements were reduced. It’s normal today for all members of a SSAS to be also the trustees of the scheme they are in.
‘Marking your own homework’
Marking your own homework has sometimes proved a problem for trustee members. Errors can be made. One common error I’ve read about concerns loaning capital from the SSAS to the company without applying a commercial rate of interest or any interest at all. In some cases, no repayments have been made to the SSAS from the company, way beyond the maximum repayment period of five years.
Another common error is misusing a loan from the SSAS to ease the company’s cashflow when loans can only be used for investing in new machinery and equipment. It’s not supposed to be used to prop up operational expenditure.
It is also a mistake to improve a property held in the SSAS using funds held outside the scheme, but not declare this as a contribution. This is classed as inflating the value of the scheme illegally.
The trustees should ensure that there are financial statements prepared, every year setting out how much the fund is worth in total. They should also allocate the total fund between the members.
Unaudited financial statements and allocations between members should be completed annually. The financial statements can take the form of a simple balance sheet, more formal accounts, or even audited accounts, depending on the trustees’ requirements. In between accounting periods, the scheme administrator can commission informal updates.
However, SSASs can be tricky to manage, and for the sake of a few hundred pounds a year, it makes sense to appoint an independent professional trustee. The choice of independent trustee is important because they should act as a scheme administrator and protect the member trustees from falling foul of making unauthorised payments or breaching tax regulations. However, some will not offer this additional service and let the responsibility rest on the shoulders of the member trustees.
Particular problems can occur when member trustees want to leave the company. In this instance, they will wish to transfer their pension away and won’t want to take a share of, say, the company’s premises. This will require valuation of commercial property and land where these assets are held. On the upside, the SSAS allows for all assets within the SSAS to be redistributed between remaining members, so it is practical to let out a departing director.
Trustee members committing errors in running a SSAS can face fines and loss of tax relief. In the worst cases, HMRC can close their scheme. There are lots of firms from pension administrators to providers and wealth managers offering SSAS administration services and advice.
However, as we start to look a little more closely at this market, we’ve also spotted that systems for managing HMRC and TPR reporting, and member communications flows, are not as slick as they need to be. Costs can be relatively high, often because there is too much manual clerical work going on in the background to keep the communication flowing and ensure regulatory reports are filed accurately and on time.
We’ve seen costs as high as £4,000 per year for managing relatively simple SSAS schemes. This seems a lot when you look at typical SIPP arrangements which, even with commercial property being managed within them, charge as little as half that. In recent months, we’ve detected an increase of migration away from some scheme administrators that are charging high fees which no longer represent value for money.
SSAS scheme members are gravitating towards pension managers which bundle professional independent trusteeship with standard administrative and reporting capabilities.
Many of the winners from SSAS switches are turning to technology to improve digital customer experience, offering fast paperless access to key documents, more accurate reporting and greater transparency over what scheme members are getting for the fees they are paying.
It seems this sleepy corner on the occupational pension world is ripe for a service upgrade.
Adrian Boulding is director of retirement strategy at Dunstan Thomas