Self-invested pension provider AJ Bell has become the latest firm in the sector to acknowledge a hit to profits from falling bank rates, which have reduced the money it retains from client cash account interest and are “entirely” responsible for a more than £5m fall in profit in the past year.
AJ Bell’s interim statement for the six month period to the end of March 2014 said a drop in revenue and profit over the year to March 2014 was “entirely due to reduced returns on cash deposits”.
In this period, revenue fell by 10.3 per cent to £26.1m at the end of March when compared to the end of March 2013. Profit before tax at the end of March 2014 was £8m, a fall of 40 per cent from £13.3m at the end of the previously year.
In April last year FTAdviser revealed that research has shown that providers are dependent on such income and can generate as much as 40 per cent of their revenues from withheld interest.
AJ Bell’s interim results said: “As reported in each set of financial statements since our annual report for the year ended 30 September 2012, the returns generated on cash deposits have been under pressure due to the combination of historic low base rates, the funding for lending scheme and tight Libor spreads.”
Speaking to FTAdviser, Billy Mackay, AJ Bell’s marketing director, confirmed the drop in profits is due to the fall in bank rate on the cash account. However he pointed out that the provider “has a whole raft of revenue lines”.
He said: “We are quite a diverse business - we have a platform business, stockbroking business, a media business and they are all feeding revenue lines.
“The challenge is that in the current environment the government is providing cash to a number of lending institutions so they don’t need our cash that much, which has brought the rate on cash down.
“This won’t affect our sustainability as we are a diversified business. Bank rates have been falling over the last three to four years and how much lower can they go? Our business is secure. We are pretty comfortable and we remain profitable.”
Speaking to FTAdviser, John Moret, a pension expert widely known as Mr Sipp, previously 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.
“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.”
AJ Bell is not the first Sipp provider to be impacted by decreasing bank rates 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.
IFG’s 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”.
