PensionsMar 27 2014

Sipps turn 25

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It is now 25 years since the UK was introduced to the self-invested personal pension (Sipp) by the former chancellor of the exchequer, Nigel Lawson. In his 1989 Budget speech, he said: “I propose to make it easier for people in personal pension schemes to manage their own investments.” And thus, the Sipp was born.

Now 25 years later, the Sipp industry is booming, with a consistent increase in plans over the years. But with age comes responsibility - namely regulation.

Sipp providers have been waiting patiently for the FCA to release its proposals for capital adequacy requirements, with many believing it will now be pushed back further to the second quarter of 2014. The much-anticipated paper was originally due to be published in September 2013, and is meant to set out exactly how the regulator is planning to increase the amount of money Sipp firms will be required to hold in reserve. The initial publication was released in November 2012, proposing that the fixed minimum capital requirement each operator should hold rise from £5,000 to £20,000.

Regardless of any changes that may happen, Sipp business is showing no signs of slowing down. A quick glance at the Tables ahead shows that, in the past 12 months alone, more than 115,000 Sipps have been set up - Hargreaves Lansdown contributing more than 34,000 new plans alone. The number of Sipps lost has stayed more or less the same, but it is unclear why. The majority of providers claim is it due to retirement and death, but in a few cases, service issues have been cited.

One key factor of this survey is that it is now one full year after RDR, so we can now see if the regulation has had any impact.

Martin Tilley, director of technical services at Dentons, says, “ Working in the medium to top end of the Sipp market and with a transparent fee structure, the vast majority of our introducing intermediaries were working on RDR-appropriate business models well before the RDR was introduced, so we have seen minimal new business changes.”

Head of technical support at Talbot and Muir, Claire Trott, agrees that for the true bespoke Sipp providers who have not paid commission to advisers, the RDR was not a big deal. “It was mainly just a case of updating forms and ensuring that the agreements are clearly in place for ongoing adviser charging payments,” she says.

“Those payments made from the underlying investments may however have ceased and advisers are taking more from the Sipp bank accounts to compensate for the work they are still doing for the client.

“It is a cleaner way for the client to see the charges if it is all taken from one place, which is really the point of adviser charging.”

But despite regulatory changes, the Sipp industry continues to grow. This survey covers 56 providers and a total of 74 plans, up from the 53 providers and 74 plans in October’s survey. Notable absentees are Aegon and Friends Life; Aegon cited time and resource issues in being unable to complete the survey, while Friends Life said it no longer feels the survey is appropriate to complete.

Among those that returned to the survey this year, after an absence last year, are Ebor Trustees, IPM, MC Trustees, Nucleus, Organon, Westerby and Zurich.

Plans available

Table 1 gives an overview of all the providers who took part and all their available plans. It outlines the core details of the providers, including minimum investment requirements, current capital regime and whether there are any links to platforms. Interestingly, there are still a few providers who do not provide online valuations, some claiming it is not applicable. Although whether this is a necessary requirement is unknown, and depends on the type of Sipp offered.

The Table also shows whether a Sipp is simple, mid-range or full-range. Although there are no official definitions from the regulator, this is based entirely on providers’ house views on how they class their Sipp. Chart 1 breaks down the types of plans, with 16 per cent simple Sipps, 20 per cent mid-range and 45 per cent full-range plans on offer.

With regards to being platform-linked, the Table shows 20 plans have no links to platforms, while nine plans did not disclose the information. This, based on our figures, adds up to nearly 40 per cent of the Sipp market that is currently unavailable on platforms. With platforms growing in popularity with both advisers and investors alike, this may have to change in the future.

John Moret, owner of MoretoSIPPs, a specialist consultancy for the industry, says that platforms have now woken up to the opportunities available in Sipps. “There is still work to do and some investment to make, but certainly the majority of platforms have refocused on Sipps,” he says. He says now is the chance for someone to take a step ahead in the platform market. “For some platforms, the challenge will be drawdown. Some are more advanced than others. There is still some way to go,” he adds.

Table 2 covers the data detailing growth in the Sipp market and how each provider is growing its business. The number of Sipps set up has risen 16 per cent from October’s survey. Notable companies include Hargreaves Lansdown, whose reported figure of Sipps set up rose from 25,000 in October’s survey to 34,000 this time. The number of Sipps lost fell by 6 per cent to 6,348, however many firms chose not to disclose this figure. The reasons for losing Sipps can be anything from retirement or death to poor service.

Significant growth

Total assets under management are up significantly from the last survey. Last year the figure was £101bn, but this year it has grown 33 per cent to £135bn. Keeping in mind some providers did not respond to the survey, the real figure could be much larger.

Like last year, we asked providers to detail the breakdown of their Sipps into simple, mid-range and full-range, although many did not answer this part. As previously mentioned, there are no official regulator definitions, so it could be the case that many providers just do not know, or do not have the systems in place to make such calculations.

Chart 2 details the market breakdown by number of Sipps using Table 2. The majority - 73 per cent - sit in mid-range Sipps. Despite many not giving responses, the Table still starts to give an idea of what the Sipp market as a whole looks like.

Table 2 also shows the average Sipp value, giving some insight as to how Sipps are used. The average value is £234,792, down just over £15,000 last year. Figures vary in size, from The Walker Crips Ebor Nursery Sipp, which has an average value of £54,467, to the JLT Personal Pension trust, with an average Sipp value of £1.3m This figure comes as no surprise as JLT is one of the largest employee benefit providers, catering to financial directors. As with any year, some figures are to be expected given their target client wealth, such as Hargreaves Lansdown’s average value of £71,558, and others that cater to higher net-worth individuals, such as Rathbones (£468,984).

One of the main talking points of Sipps over the past few years has been the regulator’s intervention - or lack thereof - into capital adequacy levels. Both the thematic reviews in 2013, and the proposed capital adequacy changes, which are expected to be announced in the second quarter of this year, are set to really shake up the Sipp market.

Robert Graves, head of pensions technical services at Rowanmoor, says the FCA’s proposed capital adequacy requirements remain a big issue for the Sipp industry. “There is general agreement that the capital adequacy regime should be reviewed and that minimum thresholds should be increased. However, the proposed formula as it stands will significantly increase the capital adequacy requirements for smaller Sipp operators who have Sipps with high fund values and a high proportion of Sipps that invest in non-standard investments, which includes commercial property.”

He says that by the FCA’s own admission this could mean a number of Sipp operators exiting the market. “It is hoped that the FCA will consider an alternative basis for calculating capital adequacy and this will be reflected in the policy statement when issued later this year.”

Capital adequacy

Our survey again asked providers what percentage of the capital adequacy requirement would be covered if the rules in CP12/33 were currently applicable. For example, if total capital requirement was calculated as £100,000 and available relevant capital is £80,000, coverage would be 80 per cent. Table 3 details the responses, and shows those who did not respond to the question - a staggering 38 per cent of respondents. It should be noted that any provider who stated more than 100 per cent coverage has been labelled as 100 per cent.

As with previous years, the purpose of the analysis is not to highlight those that do not meet the requirements, but rather to give a reflection of the industry as it currently stands, and how prepared it is should any requirements come into place. Similar to last year, most providers who chose to respond were at the upper end of the industry in terms of size. Sipp providers are still under no obligation to hold the requirements as yet.

Mike Morrison, head of platform technical at AJ Bell, says that there are two sides to the coin with regulator reviews. “On one hand, the regulator is keen to make sure Sipp operators have capital at hand to be able to make sure that any issue that arises can be met, hopefully to the customers satisfaction. On the other hand, the Sipp thematic reviews are to make sure that Sipp operators understand the business that they are in.”

He adds this is not a case of ‘big operator good’ and ‘small operator bad’, but that all successful operators will need to have a business plan and an understanding of the processes and controls they need to operate.

“We know we get a capital adequacy regime but we do not know on what basis - action is required sooner rather than later,” he adds.

The charges applied remain largely unchanged across the board, as with previous years. Costs vary hugely depending on what the client is using the Sipp for and what type of investments they want to access. Table 4 details whether providers levy a fee on an all-inclusive or per-transaction basis. Initial charges into Sipps vary, with many having a free-of-charge entry, to Mattioli Woods, which charges £895 upfront.

Depending on what the Sipp is used for, costs and transaction charges will always be relevant. For frequent traders, it is important to check transfer costs, while those who look to a Sipp to gain access to commercial property need to see if there are any additional charges such as management or annual property fees.

As property is becoming a more popular investment with Sipp holders, Table A details the charges and, more specifically, what type of property a Sipp can hold. This can be anything from hotel rooms, overseas property and land.

“The regulator’s view on property in general seems to go against the views of the Sipp profession as a whole,” Talbot and Muir’s Ms Trott says. “Property, when dealt with by competent professionals, can be a good investment. The regulator seems to focus on the lack of liquidity and the bad record-keeping of some historic providers to deem it non-standard.”

She adds that any provider who has been in the Sipp business for a reasonable amount of time will have a strong background in commercial property. “The Sipp profession was built on commercial property purchase after all.”

Restrictive approach

Barnett Waddingham’s head of business development, Andy Leggett, says that some operators are taking a more restrictive approach to property and their underlying reasons are likely to vary.

“Some may be moving away from property because they are adjusting their business models to concentrate on their own platform - where they have one - or simply to concentrate on standardised business that is high-volume, low margin and highly mechanised - the antithesis of direct investment in commercial property,” he says.

But others may be motivated by diluting the proportion of their Sipp book invested in non-standard assets in case the final basis for calculating the capital adequacy requirement remains little changed from the original proposal. He adds that some operators will be trying to cherry-pick property business so that they avoid issues that can arise with property investment, such as rent arrears and a liquidity crunch within the Sipp.

“Over time, advisers and their clients will come to realise the advantages of taking direct property investments to bespoke Sipp operators, even when the initial scenario appears straight-forward. Sadly, it sometimes takes a crisis before the penny drops - for example, in a case we were told of where the member died unexpectedly, the property proved difficult to sell and the operator would not allow death benefits to be paid in specie,” Mr Leggett says.

One aspect of Sipps that is yet to be fully regulated is that of holding non-standard investments. Table 5 (overleaf) details the types of investments allowed in each Sipp, from bank accounts and commercial property to off-plan hotel rooms and gold. The Table remains largely unchanged from previous years, as non-standard investments could be one area where providers are holding off making any changes until any final rules are published. Further detail on retirement options can be found in Table B and information on cash accounts can be found in Table C.

Ms Trott says, “It is clearly the responsibility of the provider to be sure they can administer the assets they accept into their schemes. However, there is a line to be drawn between accepting it and deeming it suitable as an investment for a particular client.”

Checking that the adviser is regulated to be giving advice is one way to try and protect the client further but she says this is not going to stop someone recommending an investment that fails. “Only a crystal ball could do that,” she adds.

It is also prudent for providers to check that assets have a limited liability and they are comfortable with this liability so as not to put other Sipp investors on their books at risk, she says. “Providers need to be confident that the business on their books is sustainable and liquid enough to pay their fees, so taking on illiquid assets and tying up entire funds will not bode well for the longevity of the provider. They need to cover their fees as well as the advisers.”

Elsewhere, Alastair Conway, chief executive of James Hay Partnership, says, “There are clear merits in both sides of the argument for permitted lists. On the one hand, caveat emptor in this day and age appears to be dead and reinstating the use of a permitted list could be a way of mitigating risks for clients, advisers and providers. While on the other hand, it would restrict legitimate investment choices.”

Added responsibility

Mr Conway says, “We have to work with the rules that we currently have and to our mind that means ensuring robust, repeated due diligence is carried out at provider level to ensure investors have access to a wide range of legitimate investments.”

By the time the next survey is published in October this year, the FCA will have hopefully announced its plans for capital adequacy, but for now, providers have to hold tight and wait.

Rowanmoor’s Mr Graves says, “As financial services is never a static environment, regulation will always be subject to ongoing change and development.” This means that a good relationship between the regulator and industry sectors is essential in the coming months.

There has never been a more important time for advisers and providers alike to perform thorough due diligence for new and existing clients. While the responsibility currently lies with the adviser, changes within the industry could mean Sipp operators will be under an even greater spotlight. With changes afoot in the coming months, figures in the next survey could be entirely different.