Self-invested personal pensions (Sipps) have become a mainstream pension product in recent years and provide greater freedom and less rigidity than traditional pensions. Available products range from low-cost Sipps and transactional-based Sipps, through to the bespoke Sipp at the other end of the spectrum, the latter of which can facilitate a much wider investment choice.
With over 100 Sipp providers currently in operation, the selection for financial advisers of the most appropriate provider to meet their clients’ needs has become increasingly complex and bewildering.
At one time, cost featured highly in this selection process and, although this is still an important area, financial stability and service are now regarded as higher priority, especially with the FCA announcing it will publish long-expected capital adequacy guidelines in Q2 this year. Meeting these proposed requirements will potentially have a major impact on the Sipp industry and we cover this as a key area for consideration below.
The FCA has also been busy with a third thematic review in almost as many years. The regulator has identified inadequacies in financial resources, risk identification and mitigation of assets in the schemes, and in operational procedures. There is a concern that a number of Sipp providers operating on very tight margins may not be able to satisfy the regulatory challenges ahead. Previous reviews highlighted insufficient controls and processes from some Sipp providers, and also noted the high concentrations of non-standard investments that some held within their book. An FCA spokesman recently commented that certain providers will have to “improve procedures or cease certain activities.”
The financial adviser therefore needs to carefully consider the choices to be made when selecting a Sipp provider. The following are some key areas and questions that advisers should consider.
Financial stability
A number of Sipp providers in operation today are not believed to be trading profitably. In view of the capital adequacy proposals and the latest FCA thematic review, it is therefore of paramount importance the chosen provider is financially stable. Consistent profitability is a good indication of a well-run company with strong financial controls in place.
Another consideration is whether the Sipp provider has access to sufficient cash reserves to actually meet the new capital adequacy requirements. The FCA wants to ensure that, should a Sipp provider cease trading, they have enough capital in place to enable them to continue to operate long enough to transfer all their investments to a new provider. However, insisting providers hold this extra funding - which in many cases will be significantly higher than required by current levels - may actually have the impact of forcing some Sipp providers to cease trading.
How core are self invested pensions to the provider’s main business?
With the fairly imminent higher capital adequacy requirements - and in some cases due to a high proliferation of non standard assets within their Sipp plans - some providers may decide that the costs and risk to their core business are too high and choose to exit the market or sell to another Sipp provider. In fact we have already seen several providers pull back from allowing certain non-standard asset classes to advisers and their clients. This causes uncertainty for clients, and advisers would do well to consider this aspect.
Service
Service, unlike features, is un-measurable but should be a core consideration. For advisers, using a new Sipp provider can be a leap of faith, as the quality of service can only usually be gauged through experience. However, demonstrating service capability can be done through externally accredited benchmarks or adviser-voted awards. These will usually reflect customer satisfaction far more accurately than service level agreements, which cannot be audited and have little bearing on actual quality of service offered by the provider. Good service will save the adviser time, money and a degree of frustration.
Due diligence
A provider should be able to supply advisers with sufficient due diligence information including outlining its experience in running a Sipp, its attitude towards certain types of investment classes, clearly laid-out fees and details of key members of staff. This level of transparency should be readily available for advisers to view.
Investment choice
Some Sipp providers only offer access to a limited range of investments, such as a choice of mutual funds, but clients’ needs change throughout their working life, therefore a provider that offers greater investment flexibility to meet those needs should be considered. Has the provider the requisite skills to be able to facilitate the full range of allowable Sipp investments? What is the exposure to non-standard assets? Non-standard assets, as defined by the CP12/20 consultation paper issued by the FCA, can range from unregulated collective investment schemes (Ucis) to unquoted shares and off-plan overseas hotel rooms.
Unfortunately, in the interests of increasing revenues, a number of Sipp providers have accepted large numbers of these non-standard assets. These providers are now in the position that they will have to meet the cost of higher capital adequacy requirements, which in turn are likely to drive up fees - or, in a worst-case scenario, force the Sipp provider out of business. Advisers should be cautious of Sipp providers that previously accepted such investments in volume.
Fees
Fees should be transparent and clear to understand. For more complex administrative functions, such as property purchases, a time/cost approach should be considered as ‘treating customers fairly’ rather than a ‘one price for all approach’, which could lead to cross-subsidisation of fees.
One area where some Sipp providers have not been fully transparent is in the taking of interest on the Sipp default bank accounts. Does your Sipp provider give your clients a competitive rate of interest?
Sipp providers should not impose barriers to clients who choose to move their funds to another provider, potentially to take advantage of other investment opportunities. However, not all Sipp providers adhere to the FCA rules for ‘treating customers fairly’ with some imposing high (and difficult to justify) exit fees. Choosing a provider that can accommodate clients’ changing needs could avoid such penalties, along with additional costs that would be incurred for establishing a new Sipp.
Technical support
Consider what level of technical information and support is available from the Sipp provider and how well trained and knowledgeable the staff are. Are they able to answer queries clearly and concisely and, if more complex pension planning is required, is there someone at the company that advisers can talk to?
The provider’s website should provide current and useful information on all aspects of Sipps and ideally providing advisers with online information on their client’s valuations, transfers and contributions, and benefits taken, if appropriate.
Clear and easy to understand literature is another key area for advisers servicing a client’s Sipp pension requirements as this will help reduce errors and omissions and reduce risk of delays that could affect investment timing.
The drivers used by advisers to select a Sipp provider today have changed greatly. Where previously advisers may only have considered a few key areas including investment choices, fees and service, they now have to consider a number of factors, not least whether their chosen Sipp provider has the financial stability and is operationally robust enough to meet both the forthcoming capital adequacy rules and the third thematic review of Sipp providers.
Poor selection of a Sipp provider is likely to force an adviser to find a replacement at some stage, which brings additional costs to both the adviser and their clients. An additional compounding difficulty could be in finding a provider that is both willing and able to accept the full range of a client’s current holdings, as a new provider may be reluctant to hold certain asset classes already held within the client’s portfolio.
It is therefore important for an adviser to try and select a provider that has the choice, desire and capability to not only offer a Sipp in the future but also offer a Sipp with the amount of flexibility required for your clients’ future needs.
Martin Tilley is director of technical services at Dentons Pensions
