SIPPing it up

This year is the biggest survey yet, as shown in Table 1, covering 65 different providers with 95 plans. The market is estimated to be around 120 providers, but our survey concerns all the major players.

However, that said, a number of companies were approached that chose not to take part, including Legal & General, which said that it did not have time, as did St James Place’s, Berkley Burke, RSM Tenon and Capita said that they do not complete surveys for anyone.

Table 1 details all of the plans in the survey and their basic details. Crucially it also includes how many funds are available for investment, showing whether full flexibility is offered or if the product falls into the ‘lite SIPP’ category. Of the 95 plans, 35 offer whole of market investment options, while a further 15 offer either more than 2,000 funds or a ‘wide range’, likely being enough options for most.

The minimum investments are also listed, showing whether the product is a more bespoke offering, requiring a large sum or regular contributions to open the SIPP. Of the 95, 50 require no initial investment, while a further four plans only ask for £1 to open the SIPP. The number that want a big whack upfront is declining, with just 15 wanting £10,000 or more. Investec comes in with the tallest order, wanting £100,000 to open the SIPP. Presumably it is looking for transfer business, rather than new savers to the SIPP.

There is currently a large debate in the SIPP market on the definition of what a SIPP actually is and whether it is based on what the investment options are and the sum invested or if it is simply a generic name for a pension wrapper with any level of self investment. Purists state that SIPPs that do not allow investment in all options are not truly a SIPP, but until a definition is decided upon SIPPs continue to occupy a wide range of products.

When two become one

Consolidation has been talked about more in the SIPP market than much else, with each year seeing industry commentators predicting that contraction in the industry will be seen in the next 12 months. 2012 is no exception.

While admitting that he has uttered the same words previously, John Moret, the so called Mr SIPP and founder of More To SIPPs, says that new capital adequacy rules mooted by the FSA will lead to consolidation this year.

While a contraction in the number of providers has been mooted in previous years it has largely been based on the fact that there is not enough business to sustain the estimated 120 providers. However, the FSA is now hinting that it may crack down on the regulation and capital requirements of SIPP providers, meaning it is inevitable that some will sell up. This is covered more elsewhere in this supplement, but it seems that the industry has not yet settled on an opinion of whether consolidation will come, be a good thing for the industry or whether it will hamper the market.

Moret says, “I fully expect consolidation to happen, I can’t see the SIPP marketplace as it is at the moment being viable long term. Contracting growth, coupled with the FSA moves on capital requirements and discussions around investments that have caused concerns, plus the downward pressure on price and the cost of improved technology that is needed. If you put all of this into the melting pot you only get one product, which is consolidation.”

However, how fast this happens depends largely on the FSA and how quickly it moves on capital adequacy. A consultation is expected this year, but a final decision by the end of 2012 may be ambitious.

Regardless, if there are teems of firms that want to sell up their SIPP business and focus their efforts elsewhere, the big issue remains of who will buy them? Big names such as Hornbuckle Mitchell have openly been trying to sell or seek investment for a long time, with no one biting. While this could be an exceptional case, it hardly shows an appetite for rivals to buy up.

Price is one key issue, with many thinking that sellers are looking at outdated valuations, asking for too much. However, the uncertainty on what capital requirements will be increased to is not helping matters.

Firms already have to find additional capital to meet new FSA requirements, if they buy another company they have to find this additional money too. The FSA suggesting that it may also base capital requirement limits on the risk profile of the assets held within a SIPP creates another cause for concern, as it may lead to the buyer having to fund even more money.

Risk of assets is another key barrier in the bid to sell up a business, as views are often polarised in the industry on what assets providers will allow. Some pride themselves on offering the full remit of investments, including UCIS and more esoteric investments like timber funds or Caribbean property funds, while others see this as too risky and not within the rules of SIPPs. These attitudes would likely have to be aligned in any buyout, as the safe players would be unwilling to take on additional investment risk that another provider has written.

All the talk of consolidation thanks to capital adequacy rules overshadows a larger question, of whether increasing capital requirements for SIPP businesses will actually protect the consumer. The FSA has talked of raising it from the current six week mark as greater expenses would be needed to wind up a SIPP business, but Robert Graves, head of pensions technical services at Rowanmoor Pensions, says that money is not really the issue.

“The FSA are using capital adequacy as a blunt instrument and if you raise it it could lead some firms to struggle,” he adds.

His argument is that if a firm gets into difficulty, it cannot just be closed down and people’s money returned to them; someone still has to take on the SIPP book and take on those clients. While increased capital adequacy may help this interim period, it will not make finding a buyer any easier.

Another argument is that capital adequacy only looks at the current running costs of a company, rather than the costs needed to continue running it as a closed book. Considering entire sales, marketing and admin teams could be shed from the business, the costs of keeping the company ticking over would be far less.

Graves argues that the FSA should look at switching the base for capital adequacy to just the costs of the elements needed to continue running the company, rather than the total costs.

Getting the size of it

Table 2 gives a measure of the size of the SIPP market, looking at each provider, its assets and total number of plans. Some providers break this down for each product, while others give an overall business figure. A few have not disclosed these details, saying that they did not have time, access to the data or they do not reveal the figures as part of company policy.

Hornbuckle Mitchell has disclosed figures but they are the same as the last survey, run in September 2011, as it is currently changing over its systems and so cannot access the data.

Looking at the headline figures and comparing them with those from September last year shows that SIPP business continues to grow. Of the providers in the survey, the total assets under administration has grown from £83,389m to £88,495, representing a more than 6% increase. The increased number of providers in the survey can account for some of this, but it also shows that the SIPP market continues to expand.

As would be expected, total plan numbers have also increased, from 422,658 to 484,560 in the current survey, a 14.6% increase. The larger rise in plan numbers than corresponding assets can be put down to two main factors: the rise in growth of smaller SIPP books and the tumultuous market conditions of 2011, which saw investments hit once more.

This is borne out in the average individual SIPP value, shown in Table 2, which has dropped from £195,524 in September to £181,951. This figure may be affected by the inclusion of some providers that were not present in the last survey that operate in the lower value SIPP market, for example Nucleus, with an average value of £95,000 per SIPP.

However, it is also likely indicative of the general move in the market of more money being invested in the platform and simple pensions market.

This rise of the platform SIPP has been much debated of late, with Skandia recently coming out and suggesting that some people had been missold SIPPs, as they would be better off in a personal pension. This attracted much criticism and is a sign of the growing divide in the SIPP market.

Regardless, the issue remains as to whether it is appropriate for someone with less than £50,000 in their pension pot to be in a SIPP. Chris Jones, product and marketing director at Suffolk Life, argues that SIPPs can be appropriate even for these lower value clients.

It may be that they are in the early stages of accumulation and will go on to build up a bigger pension pot. He also argues that while these lower end investors may not use the features of the SIPP and the full investment flexibility now, they may in the future.

Jones adds that there is also a certain cache to having a SIPP, in the same way that in the car market people can pick the basic car model or opt for the likes of a Jaguar as it comes with a better image.

However, Nathan Bridgeman, director of technical services at Talbot and Muir, says that while in principle there is nothing wrong with this, he would debate whether investors fully understand the additional costs that they are paying for this cache.

Denton’s director of technical services Martin Tilley agrees, saying that the company reviews each customer every year and those with smaller pots are sent a letter asking if they still feel a SIPP is the most suitable product, categorising those below the £50,000 mark as not really being suitable for SIPPs.

Another trend that Table 2 shows is the rise in commercial properties held within SIPPs. As at September there were 14,707, while this survey shows 23,392.

Rowanmoor is one firm that has seen a big increase, from 771 to 1,185, which it puts down to investors being more cautious. However, it also notes that it is likely that there is a time lapse in some of the property numbers, with new customers coming on board last year with the intention of putting property in the SIPP but only completing the deal months later.

Rowanmoor’s Graves says that as the provider offers the ability to put property in a SIPP, where others do not, it attracts business on this basis. He adds that 50% of the property comes from new business, but also adds that the figures could be altered by investments like hotel rooms, which could be counted as individual properties.

Denton’s Tilley said that commercial property has become bigger in SIPPs as investors are still risk averse following the recession. “People are no longer chasing 20-30% returns each year, they are happy with smaller returns. And with decent yields on rent, commercial property can offer that.”

He adds that in these risk averse times people like the fact that they own an asset that they can physically see and with returns that they get each month in the form of rent. However, investors should bear in mind that commercial property is still a risky asset and was also hit in the recession along with most other asset classes.

Assessing growth

Offering an overview of the wider SIPP market, including those not participating in this survey is Suffolk Life’s ‘survey of surveys’. It has been maintained over many years, having originally been started by John Moret, now of consultancy More To SIPPs. It analyses published data and supplements it with industry knowledge, estimating a total of 913,000 SIPPs with total assets of £104.7bn. It segments the market into:

oSimple/platform SIPPs - where all investments must be dealt via a single investment platform,

oMid range SIPPs, which can offer more flexibility,

oFull range/ bespoke SIPPs, which offer a very wide investment range with the ability to choose not only the investment, but also the investment organisation with which you wish to deal,

Suffolk Life’s estimates split the 913,000 SIPPs across the three types of SIPP, as shown in Graph 1:

o226,000 simple/platform SIPPs, with total assets of £16.7bn and average plan sizes of £73.7k

o503,000 mid-range SIPPs, with total assets of £36.4bn and average plan sizes of £72.4k

o184,000 full-range bespoke SIPPs, accounting for total assets of £51.6bn and an average fund size of £280k

As Chris Jones, proposition and marketing director of Suffolk Life, says, “The traditional bespoke SIPP maintains its position as the premium product for higher value clients with more demanding needs, so it’s natural to expect much higher fund values.”

The total market has grown consistently in recent years - around 31% pa on average since A-Day, although the rate of growth is now slowing. The biggest growth has been in the simple and mid range market - particularly the advance of platform pension accounts - recognising that most clients are not opting for the functionality, or cost, of a full range SIPP.

Skandia has been particularly vocal about platform pensions replacing SIPPs, but is it that simple? Jones says, “Platforms certainly provide a great way of holding and dealing investments, but do you really want to lock yourself - or your client - into one platform?”

For advisers using platform pension accounts, they do have to think about what would happen if they moved clients to a different platform - a re-registration of assets to the new platform will be straightforward, but a transfer of the pension wrapper will be an advised event and no doubt incur fees in a post RDR world.

Getting the costs

All of the charges that each plan levies are listed in Table 3, including setup fees, annual charges and then investment specific costs. It is here that key differences between some provider’s products can be seen, with some offering very low annual and initial fees, but charging highly for specific investments. Meanwhile others charge a higher annual fee but include transaction costs within this, making them more suitable for those making regular and frequent investments.

As some providers charge a flat fee and others charge a percentage, comparing the plan costs is very difficult. That said, many argue that cost should not be the main deciding factor in SIPP selection.

Andy Leggett, an insight analyst for Defaqto who specialises in SIPPs, says that many other factors should be considered before costs are even looked at.

Initially he says an adviser should look at aspects such as financial strength, profitability, service standards and company culture, deciding “who they want to do business with and who they trust with their clients”.

Secondary should be how well the provider fits with the adviser’s own business model and way of working, followed by looking at specific product features that both the client and adviser need. Service is another area that Leggett insists is increasingly important. Many providers now essentially just offer the service, outsourcing the investment aspect, meaning that if service is all that they offer they need to do it well.

Only then should price be looked at and used to differentiate between the remaining handful of providers.

However, as Wealthtime discovered, the fee can determine the type of customer attracted. Wealthtime’s David Baker said that its percentage fee, regardless of portfolio size, with no minimum has attracted a raft of smaller books of business. “It’s not a practice we’d encourage but we do take any size of business,” Baker admits. He picks one case recently where the total fee was £69 for a SIPP, which he admits is not ideal but is a product of the charging structure.

There has been a move within the Association of Member Directed Pension Schemes (AMPS) to have a standard fee schedule to make it easier for advisers to compare plans. Nathan Bridgeman, director of pension consultancy at Talbot and Muir, says that while his company moved to this format, there was very little movement from other providers.

Rather than imposing a standard pricing model or even that it should be based on a flat fee or percentage basis, which would be unrealistic, the move only attempts to ensure that all SIPP providers lay out their fees in the same order and format, meaning that two schedules can be put side by side and compared more easily. If this simple move has not gained traction, it seems that more drastic measures to make fees more comparable will likely never get off the ground.

Allowing them in

Table 4 shows the investments permitted within each plan. This survey sees additional categories, including agricultural land, hotel rooms and gold.

Of the 95 plans, just nine allow investment in all areas, with one of those caveating that the gold must not be physical gold. This is where the ‘true SIPP’ versus ‘lite SIPP’ debate is shown through, with the likes of Hornbuckle Mitchell, Mattioli Woods and City Trustees all allowing full flexibility. Meanwhile a whole raft of other plans restricted access considerably. One example is European Pensions Management’s Platform SIPP, which only allows access to a bank account, equities, ETF, Gilts, investment trusts, overseas currency, OEICs and unit trusts and warrants. This is because the company has a number of different products, all catering for different levels of investment needs and charging accordingly. For example, European’s Stockmarket SIPP offers additional investment options, but comes with an initial charge of £100, rather than £0 for the platform option, and an annual fee around £50 higher.

Some say it is fine that different products have differing levels of accessibility, as not all SIPP clients will need all the options all of the time. For example, an individual that is accumulating their pension pot and still has a relatively small pension pot may find that a SIPP that just allows access to OEICs, unit trusts, investment trusts and cash is sufficient, later wanting to transfer into a more comprehensive SIPP as their pension pot and appetite for adventurous investments grow.

However, those that argue in favour of the full bespoke SIPP model say that those individuals with small pots and who wish to just invest in unit trusts should not be in a SIPP at all, but rather a stakeholder or personal pension.

Getting the property

As shown in Table 2 previously, commercial property is increasing in popularity, with many investors seeing it as a relative safe haven in these turbulent times. This means that Table 5, which details the costs of buying, selling and managing a commercial property, is more important than ever. Only providers or products that permit investment in commercial property are listed.

Once again we see the difficulty in comparing the costs of each provider, with some charging on a percentage basis, others a flat fee and others on a time cost basis. Some providers simply state a minimum, but no maximum, meaning it is nigh on impossible for an investor to assess how much the total process will cost.

Keeping an interest

Expanded from the previous survey, Table 6 details the interest rates offered on cash accounts held within the SIPP. In addition to the factors stated in previous surveys, such as the current rate offered and whether access to other accounts is permitted, the Table also looks at the interest retained by SIPP providers and how much this amounts to.

Of the plans listed, 30 do not retain any interest, while 32 do, but providers were not exactly forthcoming with details on how much interest is retained and how this is calculated. One particularly poor example is Hornbuckle Mitchell, which said that it retains interest at a variable rate, but that the process for how much it retains is “complicated” and difficult to explain. When pressed Ross Millar, marketing executive at Hornbuckle Mitchell, said that it was not a simple answer and beyond his knowledge.

When this “complicated” working directly impacts how much providers are taking from clients’ interest each month, it seems rather crucial that it is easily explainable to clients. You cannot help but feel that, if in any other walk of life a company could not explain how much it was taking out of client’s pockets, it would not be accepted.

Those that did provide more detail on how much interest was retained did not overwhelm with information, with the majority simply stating that they take anything that the bank pays over and above what they promise to clients. Fortunately a handful of providers stated the exact percentage taken, with the highest of these being 1% from Ashcourt Rowan. While this seems very high, particularly since clients in this account are currently only getting a measly 0.1%, it is hard to lambaste them too much as it is likely that many of their competitors are taking more and just not revealing it. While Ashcourt is taking a margin 10 times that of what the client is getting on their own money, at least it is open and honest about it.

On the topic of rates, once again we see only a handful promising a minimum interest for clients, with just seven providers giving a base. While some of these are ridiculously low, such as James Hay’s 0.00001%, Nucleus must get special mention for guaranteeing 0.75%. This is higher than the current Bank of England base rate and also higher than the rate that many other providers are offering. It is also linked to that fact that Nucleus does not retain any interest paid by the banks.

The margin taken by SIPP providers on cash accounts is often overlooked, with it being a more common talking point in the platform market. With bank interest rates having dropped to all time lows for a consistent period, many are citing this as a reason that SIPP providers will have to put up their costs, as they are no longer getting huge sums from this area. Regardless it still represents a significant sum of money that is being diverted from clients.

Most providers argue that the cash accounts are only used as a temporary holding place for money waiting to be invested or from recently sold investments, with longer term cash being designated to fixed term accounts.

However, with cash holdings having increased over recent months and years, as a response to the bumpy economic climate scaring people away from risk, more and more is being held in these cash accounts. Without exact figures it is difficult to assess the extent of the issue, but research from Towers Watson shows that in the UK 2% of SIPP holdings are in cash. If the market is valued at £104.7bn, then 2% represents £2.09bn. If only a quarter of this is held in the default cash account, rather than longer term holdings and the provider takes a 1% margin this represents £5.2m of missed interest for clients. Not to be sniffed at.

Assessing the options

Table 7 looks at the retirement options available for each SIPP plan, with the majority offering the full wealth of at retirement options, including income drawdown, phased drawdown and phased retirement.

While not considered by many clients when initially opening a SIPP, these options may be crucial when reaching the retirement date. If a plan is picked that does not allow the full wealth of options, retirees may find themselves having to move plans, at considerable cost, just to have the retirement that they want.

Conclusion

While there is certainly doubt in the market as to whether 2012 will eventually see consolidation in the SIPP market, it seems inevitable that this year will mark big change for the sector.

Current debates likely to see some conclusion this year include those on the growth of the SIPP market as a whole and how much the platform market will make up of this. Many reckon that the current growth rates of 30% pa as unsustainable, while others think that they will continue but in the platform and simple SIPP market, rather than the bespoke arena.

This does not even consider how the increasing regulation from the FSA will affect the sector nor how the capital adequacy rules will affect providers’ underlying finances.

Investments made within SIPPs are another area on which the FSA is likely to release more information this year, with those allowing large numbers of esoteric investments predicted to come into the firing line. Although admittedly these predictions come from those with more cautious investment strategies.

It seems likely that SIPPs will reach their peak this year, in the number of plans, providers and assets, but how far each of these elements fall is up for debate.

laura.suter@ft.com