Some self-invested pension providers have been hit by falling bank rates, causing their income from retained client interest to plummet by up to 50 per cent, according to John Moret, a pension expert widely known as Mr Sipp.
FTAdviser previously revealed that some Sipp firms are continuing to be unclear on how much interest they are retaining from cash accounts, despite the regulator’s new disclosure rules.
It seems that some providers are dependant on this income, as previous research from Mr Moret, principal of consultancy business MoretoSipps, revealed six firms produce more than 10 per cent of their revenue from withheld interest on client cash accounts, with the figure at one firm standing at 40 per cent.
Several Sipp firms have admitted that the rates banks they are paying providers have dropped recently, with James Hay’s recent results revealing that profits fell year on year as a result of ongoing investment initiatives and reduced income from withheld interest on client cash.
The results published by Irish parent IFG Group showed a drop in adjusted operating profit from £3.4m to £2.5m.
The results stated that revenue from new business was “partially offset by the effect of attrition and a challenging interest rate environment as interest earned from banks on client deposits has been impacted by lower rates”.
Speaking to FTAdviser, Mr Moret said the heady days of bulk rates of three or four per cent have now gone “probably for good”, but for some of the larger providers, rates of around 1.5 per cent can be achieved “giving them a ‘turn’ of a similar amount”.
“This is confirmed by the rates declared as retained by Standard Life (1.27 per cent) and Scottish Life (1.5 per cent) in a [recent Money Management] survey.
“If we assume that about 20 per cent of Sipp assets remain in cash on a day-to-day basis – and that total Sipp assets are £150bn, that suggests that the annual income from bank interest across the industry as a whole is in the region of £50m. That averages about £40 per Sipp per annum.”
“I don’t have a problem with this, but I think one of the consequences of the reduction in rates is that some providers have seen their income from this source reduce by 30 to 50 per cent.”
Mr Moret added, that coupled with the increased costs of the stricter regulatory regime and the need to update systems etc for the budget changes, this was prompting consolidation.
He said: “I don’t think it’s a coincidence that profit margins are falling and we’re seeing increased M&A activity in this sector.”
Alastair Conway, chief executive of James Hay, admitted that the continued low interest rate environment has impacted “one element” of James Hay’s revenues.
However, he noted: “As an investment platform and Isa manager as well as a Sipp provider we have a broad range of income streams that other more traditional Sipp players do not”.
Martin Tilley, head of technical support at Dentons Pensions, said that if a bank does drop the interest rate and a Sipp is dependent on that income stream for operational profit, a provider will have to make a choice.
“They might have to be either be less profitable, reduce the interest rate (if any) paid to their clients, and/or increase other revenue streams.
“It will certainly not impact all Sipp providers. There are many operators not taking an interest revenue and others where the revenue is modest.”
Claire Trott, head of technical support at Talbot and Muir, added that they have not seen a cut in the rates on the default account on its Sipp, and nor are they expecting to see one in the future.
She said: “The biggest issue will be for those that are subsidising their fees with the interest turn they are retaining if the rates reduce.
“Providers who currently offer significantly discounted or ‘free’ Sipps will be hardest hit and may well need to increase their fees to maintain services, which may come as a shock to the client or adviser who would not be expecting this.
“A worst case scenario for these providers would be a significant number of clients transferring out to a cleaner proposition, which would compound the issue for them.”
John Fox, director at Liberty Sipp, added: “The blunt truth is that a lot of Sipp companies have always taken this fee because it is an accepted norm throughout the industry.
“I just can’t see customers accepting it in the new world of pensions, where transparency is vital and when IFAs have to justify their fees in relation to everything they do.”
