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P2P and pensions - solution or fad?

27th Sep 2016
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It remains true that many professionals in the advisory space are sceptical, or at least cautious about the relative merits of peer to peer (P2P) investing. Accountants and IFA’s, who, between them make up the vast majority of one to one advice to individuals looking for financial guidance, are two groups that have shown particular resistance to the wholesale adoption of this newcomer phenomenon.

There are a couple of reasons for this, I suspect. The most obvious one is that both groups operate in a heavily regulated environment where due diligence is essential and the regulatory and reputational consequences of getting it wrong are pretty dire. A rear view mirror landscape that is littered with the wreckage of failed investment propositions that has led to scandal after scandal does nothing to alleviate this caution.

Another is that the relatively short amount of time that P2P platforms have been operating means that really robust evidence, based on empirical analysis of the likely returns to an investor is impossible to deliver at this point. As has so often been stated, the majority of P2P providers have not yet been through a full ‘cycle’ of the economy, so we have no way of really knowing how good their underwriting really is, or how well their loss protection mechanisms will function in the face of a full blown recession. It is worth noting, however, that most of them were born into a recession, and their direct comparators, the banks, didn’t exactly fare too well in those circumstances either.

And yet, in some ways they not only have a place, I believe that they may provide a solution, or partial solution to a long standing and very real problem for one particular group of people - pensioners looking for income in retirement.

Since George Osborne introduced pension freedoms a couple of years back, there has been a huge reduction in the number of private pension owners choosing to purchase an annuity. In part this is circumstantial. Historically low interest rates and the effect of quantitative easing have combined to make annuity purchase look pretty unattractive.  But what are the options? Most income funds have heavy exposure to either equities or bonds. In both cases, there is the real possibility of capital value fluctuation. Advisers are under pressure as never before to come up with income generative investment solutions for their over fifty five clients who wish to retain control of their pensions, but also draw some income without diminishing the capital value.

So can P2P help here? In the past the structure of P2P has made it difficult to allow such an investment into a SIPP or SSAS product. This is because of HMRC’s connected party transaction rules where you might find yourself inadvertently lending your pension money to a connected party through a P2P platform and thus be subject to an unauthorised payment charge. Thus most SIPP and SSAS providers have steered clear of allowing this asset class to be held within their products.

There is also an impact on the capital adequacy requirements of a SIPP provider as P2P investments are classed as non-standard by the FCA, and thus significant numbers of pension owners holding these types of investment would force the provider to increase their capital adequacy allocation accordingly, something that many would find difficult.

Market forces are a marvellous thing, however, and the combination of a dearth of real income generating investments, combined with an innovative SIPP and P2P industry is starting to show some real and credible attempts to overcome these problems and provide a solution to the income in retirement conundrum that advisers would be comfortable in recommending.

Some of the larger P2P platforms are now in detailed talks with specialist SIPP providers to deliver a product that has, through clever innovation and intelligent financial structuring, resolved the connected party and capital adequacy issues. Aimed specifically at investors looking for income in retirement this will, I understand, also provide high levels of capital security and an income expectation of anywhere between 3.5 and 5.5% depending on the terms selected.

If this indeed does become a reality it is not hard to see a behavioural step change just round the corner, where for a particular class of investor seeking pension income, P2P is no longer a fad at the margins, but a really important asset class capable of delivering the returns they need and, indeed, expected to begin with.

Let’s see what happens. If It does come off then we will have seen technology and innovation provide a solution to a real problem that effects a lot of people. I like that, a lot.

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By WillWatling
01st Oct 2016 10:20

Having just written a white paper on P2P & the challenges of adoption by intermediaries I agree with the article.

However, I don't agree that we haven't got enough data to confidently predict how it should perform. We have UK data on AltFi over 10 yrs, plus comparable data on unsecured loan returns from 95. This is through two of the biggest stress tests we've known (dot com bubble & credit crunch). The data shows avg yield about 5.5% (from memory) but importantly, without a single year of capital loss! Compare that to the wild volatility of equities, commercial property (where some funds were suspended from trading) & even gilts.

So I agree that with the right regulations & fund structures that P2P could be used to generate a stable high yield, without capital volatility, letting clients sleep at night too.

Let me know if you would like a copy of the white paper. You can also come to the P2P conference free of charge, 1st Nov at the Swift offices in the Corn Exchange in London & hear from a host of experts on these topics.

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