PensionsOct 1 2015

Consolidation ahead?

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Consolidation ahead?

The word ‘consolidation’ has been used with remarkable regularity in recent years. But despite a flurry of acquisitive activity a couple of years ago, the frequency and size of deals has diminished to the point of near stagnation in recent months.

Let us examine why this might be. To understand this, it is perhaps wise to consider why consolidation has been, and may again be, necessary. It should be made clear that here we are dealing primarily with Sipps operating in the non-platform area of the market. While consolidation in the platform marketplace to increase assets under administration is of course desirable and probable, such transactions are less likely to materially impact the underlying client.

A trigger to consolidation was the individual regulation of Sipps, by what was at the time the Financial Services Authority in 2007. It was at this juncture that the Sipp market was allowed to expand by permitting any firm who could demonstrate competence to be regulated to operate Sipps.

This was initially good news for consumers. Additional organisations competing for the same market resulted in innovation of product and market forces driving down fee levels. However, as advisers will know, cheap is not always good. The industry’s reputation for service suffered, as did the attention some Sipp operators gave to the acceptance of certain asset classes within their book.

It was primarily as a result of the latter that one or two failures occurred of both investments and Sipp operators. That resulted in the regulator (the FSA and its successor, the FCA) tightening the standards in successive thematic reviews followed by the review and increase of capital adequacy requirements. The latter will be introduced effective from September 2016.

The regulator in its own documents originally suggested that the capital adequacy changes alone might result in 14 to 18 per cent of providers exiting the market, although this was later revised down to around 10 per cent as a result of later softening of the requirements.

However, if coupled with the more stringent requirements surrounding asset acceptance, with the inevitable cost implications, it is easy to see the pressure on the Sipp operators.

Other factors have also risen. From July of this year, tapering of the annual allowance will impact earners of £110,000 and above, and this could result in the reduction of interest and contributions at the top end of the market, which will impact future new business.

At the same time the government has launched the Green Paper consultation investigating the incentive to save – which heavily features questions surrounding the future of tax relief on pension contributions, particularly towards the top end of the market, which traditionally favoured Sipps.

We can see that consolidation within the market would be a logical conclusion. Some commentators have suggested that the number of Sipp providers could reduce to as few as 50 by 2018, but why the lull in recent activity?

Some firms whose Sipp activity was not core to their business have already taken the jump to exit the market. Other “clean” books of business were snapped up at an early stage.

The uncertainty of future new business streams created by the government’s recent activity, mentioned above, makes certain elements of a Sipp operators business difficult to value and

the experience of some acquisitors of deals that were more complex than expected has led some firms to cease looking for new targets.

One thing of which we can be certain though is that consolidation has not stopped. Once the outcome of the Green Paper consultation is known and as we get closer to the capital adequacy deadline more deals will be done.

Impact

So what implications will this have for advisers and inevitably their clients?

Firstly it is not just consolidation that has been impacted by regulatory changes. Some operators, faced with the requirements and costs associated with meeting the increased controls of asset acceptance, have already scaled back their propositions to restrict the range of assets they are now prepared to accept. Others have introduced tighter controls which impact costs for offering the same services that have previously been available. It’s these changes in proposition that advisers will need to assess, especially if the consolidation bandwagon starts to roll again.

An adviser will most usually have placed their client with a particular Sipp provider based on specific criteria. The list of factors leading to Sipp selection is long but key considerations are usually product features, service and charges. It is probable that at consolidation one or more of these factors will change, albeit not immediately, as the new owner seeks to integrate the acquired book with their own.

There will inevitably be upheaval if changes of staff or premises, or migration of clients from one operating system to another is to occur. It might be here where cracks start to appear particularly in service delivery.

So should advisers be proactive in pre-empting possible consolidation? Might such a move be jumping from the frying pan to the fire? It is difficult to identify potential sellers in the market and no one will openly admit they are “on the market”. Care should also be taken with acquiring firms as integration post-completion could result in resources being stretched and perhaps otherwise taking their eye off their current client bank.

Survey analysis

Some candidates can perhaps be identified through surveys, such as the one within this special report; those who are committed to obtaining new business and to the retention of current clients. Many will be happy to report the meeting of capital adequacy requirements ahead of the deadline and those that can be identified as financially strong are more likely to weather changes brought about by amendments to legislation and/or regulation.

There is also the question of cost. A pre-emptive move would need to be justified and there will be costs associated with the new Sipp vehicle as well as the costs of transfer/re-registration, assets and any wind-up fees from the old provider.

On consolidation, any resulting need to transfer from one provider to another is usually done at little or no cost to the client. The merging of two businesses is not always a bad thing and there is always a chance that the new provider may offer similar or better features and lower costs. Indeed a “best of both worlds” would be the ideal outcome.

However, it is probably best practice for an adviser to be aware of their clients’ exposure to the various Sipp operators and to continually monitor those providers carefully so that their propositions are known and can be compared against the immediate and future needs of the client.

Market commitment

It would also be prudent to align with Sipp providers that have demonstrated commitment to the market so that in the event those clients are subjected to a move that may impact their future Sipp requirement, an alternative operator is already in their sights.

Martin Tilley is director of technical services at Dentons Pension Management