This year has not only seen the self-invested personal pension (Sipp) hit 25 years, but it has also seen the retirement space as a whole undergo a massive overhaul. Since chancellor George Osborne announced there should no longer be the need for retirees to own an annuity, the industry has turned to look at different pension options.
For the past few years, Sipp providers were waiting for the FCA to release news on its proposals for capital adequacy requirements. But on 4 August, the regulator announced it had set the requirements that Sipp operators will have to hold a minimum of £20,000. Although the change was not unexpected, the paper – which was originally due to be released in September 2013 – means the minimum requirement has risen drastically from the initial publication released in November 2012, which had proposed the minimum capital requirement each Sipp operator should hold at £5,000. The announcement was met with much debate, as anticipated.
Mike Morrison, head of platform marketing at AJ Bell, says, “It is pleasing to finally get the capital adequacy rules but they are still confusing. There have been commentators suggesting that assets under management is not the right measure and it is confusing around the definition of standard and non-standard investments and particularly around commercial property which becomes non-standard if it cannot be sold in 30 days. This would have been the ideal time to launch a permitted investment list.”
As expected this year, the Sipp industry has already seen some consolidation. Mattioli Woods subsidiary City Pensions has acquired the pensions administration business from a subsidiary of Ashcourt Rowan, UK Wealth Management, for £355,000. This came just a few days after Dentons Pension Management announced it had acquired the Sipp book from MAB Pensions for an undisclosed sum.
This year’s survey covers a total of 72 plans and 50 providers. Notable absentee Friends Life says it does not currently have an individual Sipp open to new business so the survey is no longer relevant, while other no-shows cite lack of resource and time in order to complete the survey.
Platform availability
Looking at Table 1 gives an overview of all providers who participated in the survey, and their available plans. The Table also looks at whether the providers are available on platforms and notably, the survey has changed slightly in defining the type of Sipp. Previously, respondents had been asked to categorise their Sipps by simple, mid- and full-range, but in preparation for any market splits in the next year, this has been changed to ask whether Sipps are platform-integrated or independent open architecture.
As Chart 1 shows, 79 per cent of all Sipps classify themselves as open architecture, with the rest – 33 per cent, or 15 plans – defined as platform integrated.
Availability on a platform is one aspect of Sipps that many advisers may be looking at in the future, if only to make it easier to access your Sipp. But 21 plans still do not have a link to any platform – 30 per cent of the survey respondents. In the run up to the upheaval the pensions industry will see in April 2015, being available on a platform is one element that providers will need to look into, particularly as platforms grow in size and as the control associated with Sipps now offered by platforms develops.
One platform that offers Sipps is AXA Elevate. Andy Zanelli, head of retirement planning at AXA Wealth, says the platform provides advisers with the functionality to manage retirement benefits in real-time and to make immediate withdrawals and income payments.
The Table additionally looks at a plan’s minimum initial investment, lump sum and monthly investments. It also asks providers if they offer online valuations. Although this may not be a necessary component, it is still somewhat surprising that there are many providers who do not offer it.
Table 2 covers the data detailing any growth the Sipp industry has seen. In 2013, there had been 99,460 set up in the previous 12 months – April this year saw 115,787 new Sipps – but this year’s survey shows just 92,012 plans were set up, but far fewer Sipps were lost this year than in previous surveys.
Just 3,459 Sipps were lost, while in previous years this figure has been around the 6,000 mark. As with last year, Hargreaves Lansdown contributed a large proportion of new Sipps, reporting more than 37,000 set up, although its figure is as from 31 March 2014 so is slightly skewed against other respondents. Aviva and Standard Life also both contributed a large number of new Sipps, with 14,343 and 13,683 respectively.
Compared with April 2014’s survey, the number of new Sipps set up fell by 20 per cent, although when looking at the same period last year, this survey shows a fall of just 7 per cent.
Previous years have seen providers reluctant to detail how many Sipps they have within each type of plan – this year open architecture or platform-integrated – but this year, the majority of providers responded to this question, showing 402,158 of Sipps are platform integrated and 196,103 plans are now classified open architecture. This is detailed in Chart 2, which shows a market breakdown by the number of Sipps drawn from Table 2, showing 67 per cent are platform integrated and 33 per cent open architecture. For those that did not respond, it may be the case that there are no official regulator definitions of what a Sipp is classified as, and many smaller firms do not have the technological capacities to make such calculations.
The Charts shows that platform-intergrated Sipps are much more popular with investors, despite the prevalence of open-architecture schemes.
Dramatic growth
Table 2 also shows that as well as the total number of Sipps set up, the total value in force has also grown dramatically. It now stands at £128bn – while in October 2013’s survey the total value was £101bn – with an average Sipp value of £242,575. This shows the Sipp market is increasing over the years and in advance of April’s changes to the pension industry. The average has increased on the last survey’s figure of £234,792, but varies dramatically across the board. The highest average Sipp value is from the JLT Personal Pension trust, with an average Sipp value of £1.1m, which isn’t a surprise considering JLT is one of the largest employee benefit providers and it caters its Sipps towards financial directors of firms. The Liverpool Victoria Sipp has an average Sipp value of £53,000 and Hargreaves Lansdown sits at £70,679.
Table 3 looks at one of the more topical areas of the Sipp industry – capital adequacy. As previously mentioned, in August the FCA unveiled its intentions after years of waiting. It should be noted, however, that this year’s Sipp survey has asked for figures to 1 August 2014 and the changes do not come into action until September 2016, so there is still a long way to go for some providers. The question we asked was purely to find out that, should the rules be currently applicable, what percentage of business would be covered.
Jeff Steedman, head of Sipp and Ssas business development at Xafinity, says, “Capital adequacy will have a significant impact on some providers as clearly those with large volumes of non-standard investments may be hit hard.”
Although contentious for some, Claire Trott, head of technical support at Talbot and Muir, says the changes to the requirements for Sipp operators are “positive for the industry”, making it stronger and it should also increase the levels of trust from consumers. “There have been a significant number of negative stories about the pensions market recently which will deter savers when pensions are becoming an increasingly flexible way to save for retirement,” she adds. “The FCA is clearly taking seriously its responsibilities to protect consumers and the increases seen in capital adequacy requirements for Sipp operators will ensure that those firms willing to commit to the long term can be trusted to fulfil their promises to advisers and their clients.”
Last year, 28 providers failed to respond to the question, but this year, just 24 did not respond or said it was not applicable – for instance insurance companies or platforms. Of all the providers who responded to the question, just two providers had less than 100 per cent in reserve – Westerby and Rowanmoor. Westerby also has the highest percentage of non-standard assets – 60 per cent in its Private Pension Full Sipp – which is closely followed by City Trustees’ Full Sipp.
Every provider has different ideas of due diligence when it comes to the non-standard investments that can be held in Sipps. Robert Graves, head of pensions technical services at Rowanmoor, says there are two key aspects to Sipp investments: Acceptability and suitability. “As a Sipp operator and trustee, we undertake extensive due diligence on investments we are asked to invest Sipp funds into,” he says. “The suitability of a particular investment for a client is very much the area of expertise of the regulated financial intermediary, which we require to be involved in all our Sipps.
“We would expect them to use their expertise and knowledge of the client to determine whether the investment is suitable for a particular client, taking into account the risk and potential return of the investment.”
Commercial property
Alongside the regulator’s capital adequacy requirement ruling, it also announced it would be adding UK commercial property to the standard asset list. The regulator said bank account deposits, physical gold bullion, National Savings & Investment products, units in regulated collective investment schemes and UK commercial property have all been added to the standard assets list.
The shift represents a major change since its last statement in May this year that claimed it would be keeping the asset as non-standard. In response, the FCA said, “Our experience of Sipp operators that have exited the Sipp market has shown that, where non-standard asset types are held within schemes, the costs involved in transferring these schemes to another provider can be significantly higher than for schemes containing only standard asset types. We did not receive feedback that persuaded us otherwise.”
The announcement was met with praise from many providers. Table A, available online at ftadviser.com/mm, details the charges and types of property a Sipp can hold – this ranges from hotel rooms to overseas property to land.
Andy Leggett, head of business development of Sipps at Barnett Waddingham, says, “The regulator has quite rightly come round to the view that commercial property is usually a standard asset within Sipps. It is generally a fairly conservative, income-producing, real asset and one that has been a major contributor to the growth of Sipps for their 25 years of existence.”
Mr Leggett adds that, in general, the more commercial property a Sipp operator has within its book, the more attractive it will be to acquirers. He points towards the firm’s acquisition of Harsant as an example, which will see the firm add more than 400 Sipp clients to its existing business. Furthermore, the group has also acquired Chase de Vere’s Sipp and Ssas book for an undisclosed figure, in a deal which will see the firm add 250 Sipp and 275 Ssas clients.
But not all providers have met the decision with open arms. Suffolk Life has been vocal on its view that UK commercial property should be classed as a non-standard asset. Greg Kingston, head of marketing and proposition at the firm, says, “As PS14/12 is written, until the industry can provide demonstrable evidence that property can be transferred within 30 days in the event of an operator winding down it is difficult to see how it can be classed otherwise.
“Leaving the decision on how to categorise property in the hands of the provider who must then stump up the capital behind it is likely to be a decision that needs review.”
Charging
One thing that must be kept in mind when looking into which assets to invest in is charges. These remain largely unchanged over the past few years. Costs across the provider board vary hugely and depend on what the client is specifically looking to use the Sipp for and which assets they wish to invest in. Table 4 details fees for initial set up charges, annual costs, and transfers in and out, as well as transactional fees for various assets. While the Table does not change a great deal over the years, it is important to keep up-to-date with any potential changes and for frequent traders, it is key to check out transactional costs.
Every Sipp is different and every provider offers different assets. Table 5 takes a look at different types of investments allowed in each plan, from commercial property to shares to hotel rooms.
This year, a new column has been added to the Table in the run up to September 2016: Overseas commercial property. Of all respondents, 14 say they offer the asset, despite it being a non-standard asset. The Table also shows how many funds are available for each plan and whether – if investing in esoteric assets, which many Sipps are used for – there are internal or external due diligence processes in place.
Available online, Table B details further retirement options – whether there is phased retirement or whether capped, flexible and phased drawdown are available plus any charges. This Table again remains largely unchanged and through the years, the charges have increased but not dramatically. Table C describes the account provider and current account rates.
A future in D2C?
One area that could prove to be key in the next few years once pension pots become easier to access is the ability to have a direct to consumer (D2C) Sipp.
Chris Smeaton, director of marketing at James Hay Partnership says the firm does not believe there is a place for offering Sipps direct to consumers, particularly “where Sipps do not have to have all of the complexities and higher costs we have seen in the past.”
“We see a growing trend where consumers want the option to mix and match their approach to financial products with the option to take full advice, or ad hoc advice at appropriate points, for example to purchase certain assets, or at-retirement only.”
Talbot and Muir’s Ms Trott agrees the D2C approach will not work with Sipps. ”Just because an end client knows about investments in general doesn’t mean they are fully aware of all the intricacies of investing within a Sipp and the implications of their actions such as taking benefits and the impact of death benefits this may have,” she adds.
The Sipp industry is currently booming but there is lots of talk in the air about consolidation. And it is no surprise that there have been acquisitions already after the FCA announcements, but how many more are yet to be seen. Many commentators believe there will be a steady pace of consolidation before September 2016. Rupert Curtis, managing director of Curtis Banks, says “We view the Budget 2014 changes as a positive factor for Sipps, with the increased flexibility available, and expect to take full advantage of this with new products and innovations. We see the current Sipp market as providing substantial opportunities for our business, but others will suffer.”
April 2015 will be just the start of a change in the pensions landscape, but there is still a long way to go in the Sipp space and September 2016 will show the full extent of it. Now the need for a retiree to have an annuity has been abolished, there is even more of a need for advisers to be finding the best pensions options for clients. However, for now, the industry must wait to see the full impact of the 2014 Budget on pensions.
