Capital adequacy requirements are likely to drive many self-invested personal pension providers out of the market, but exposure to esoteric investment liabilities could prevent the necessary consolidation to prevent clients being cut adrift.
With final guidance on capital adequacy requirements expected next month, smaller providers or those with Sipps as a non-core business are starting to consider the expense and regulatory burden of staying in the market.
When it published draft rules which stated higher levels of capital would need to be held against non-mainstream assets, including commercial property, the FCA predicted 20 per cent of providers could exit.
Greg Kingston, head of marketing and proposition at Suffolk Life, said: “The balance sheets of smaller, more boutique Sipp providers have become increasingly reliant upon new business volumes, and the likely outcome from these two key regulatory actions will be to place these business models under significant pressure.
“That will result in these smaller Sipp operators becoming acquisition targets out of necessity. That said, prospective buyers will remain very cautious about the risks of acquiring books containing high numbers of single investment, often illiquid, plans from which there is little prospect of a return.”
Mr Kingston added that despite this environment, and with careful due diligence, Suffolk Life remains actively acquisitive.
Martin Tilley, director of services at Dentons, commented that the trend had already begun, citing his firm’s takeover of RSM Tenon’s Sipp business last year.
He said: “We’ve also been approached by several other firms looking to exit the market, some of which we’ve looked at in detail and some we’ve declined interest.
“I think it’s fair to say that Dentons are happy taking non-standard assets with acquisitions and will be as flexible as we are with new business, however, we will apply the same strict due diligence process when reviewing the assets as we would with any new business.”
Mr Tilley stated that consolidation has not been as easy as many have predicted.
He said: “Whilst many providers may call themselves acquisitive, it will be selectively and for example we wouldn’t take on a book where there was 90 per cent we liked and 10 per cent we didn’t because we don’t want any of the 10 per cent at all.
“You could end up with some Sipp providers being cherry picked for the clients that everyone is a happy to take on, but which will leave behind some of the clients who hold assets that other firms don’t want. This is not the outcome the regulator is looking for but it could be a consequence.
“There has been talk of a default Sipp provider of last resort, but I can’t see a commercially-minded provider wanting to step into this role.”
At the start of July Talbot and Muir acquired the Ssas administration business of Oval Financial Services, with principal Graham Muir saying that the firm “remains acquisitive and with the upcoming changes to the capital adequacy requirements for Sipp and Ssas firms, we anticipate that more books of business will be sold”.
Claire Trott, Talbot and Muir head of technical support, told FTAdviser that small players that have accepted lots of esoteric investments will struggle to find a buyer.
She said: “We’re not interested in taking on anything too risky, we don’t want the reputational risk surrounding these assets. There’s some consolidation to be had, but I’m not sure its that extensive.”
The Financial Conduct Authority’s third thematic review into Sipps was published at the start of this week (21 July) along with a ‘dear CEO’ letter that accused operators of still failing to manage risks and ensure customers are protected appropriately, despite recent guidance.
The results of the review - which focused on the due diligence procedures Sipp operators used to assess non-standard investments - were deemed shocking and concerning by market commentators.
Neil MacGillivray, chairman of the Association of Member Directed Pension Schemes, said that consolidation has already taken place, but is slowing due to proper due diligence being carried out on esoteric liabilities.
He said: “The Revenue [HMRC] has said that come September if a Sipp company loses its permissions and the business is to be transferred on to a third party, they will not have the tax liabilities, so that’s going to make it a lot easier and stop people cherry picking which bits of the business will be taken.
“We have no doubt there will be further amalgamation in the market, going from unregulated to regulated in a relatively short period of time, some businesses have been better able to adapt to the changes than others.”
