Looking back at 2015 it is tempting to reflect that we have lived and worked through the greatest pension change of our lifetimes. However, pensions are now just as much about political capital as retirement capital. Further seismic changes can be expected in the future, and next on the list is the reform of pension tax relief.
Most full Sipp operators took the introduction of pension freedoms, on 6 April, in their stride. While other pension operators were besieged with calls to cash out small pots there was less impact on full Sipp providers.
Requesting permission
Anecdotal evidence suggests that there were more requests to convert capped drawdown to flexi-access drawdown (and change the pension income amount) than there were to fully withdraw the fund. That’s just as well, as the full Sipp market had its hands full elsewhere.
Last year’s Intelligence report explained how a crack had appeared between the full and platform Sipp markets. In 2015 that crack widened, and differences have become more complex and fragmented. The pace of change has been governed by the FCA, which has repeatedly raised concerns about some parts of the Sipp market.
The regulator has used two principal tools to address those concerns. Firstly, it introduced a new capital regime for Sipp operators which, after much consultation, appears to have settled and will be introduced in September 2016. This aims to increase the financial resilience of Sipp operators.
Secondly, the regulator categorised Sipp investments into standard and non-standard assets. Standard assets were generally liquid and easily tradeable whereas non-standard assets were more esoteric and unable to be realised within 30 days.
With a few loose edges the Sipp market was defined by the investments within it – standard assets being mostly the preserve of platforms which capitalised on better technology and lower costs, and non-standard assets remaining the specialist area of full Sipp providers.
But the change didn’t stop there. Due to pressure from the regulator or financial concerns (or a combination of the two) a number of full Sipp providers stopped accepting non-standard investments. It seemed a strange decision at face value, as it put them in direct competition with the platform market. Most full Sipp providers are small and would struggle to compete with the lower cost bases of platforms.
Then the regulator intervened once again and refined its categorisation of investments. A number of investment types that were once defined as non-standard became standard assets. In doing so they also relaxed the capital requirements for Sipp providers which, at first glance, may seem contradictory to the objective of a financially stronger Sipp market. More on whether advisers take investment classification into consideration can be seen in the Charts here.
But while the regulator and full Sipp providers have been on a lengthy, turbulent journey together, they have arrived at a destination where both seem to be relatively content – for now at least. The regulator has other good reasons to be pleased.
Better knowledge
They now know and understand the Sipp market better than before. The third thematic review of Sipp operators and the consultation on capital requirements has brought significant experience.
Secondly, the regulator now effectively controls what is and is not an allowable investment in a Sipp. The list of non-taxable property may still be the responsibility of HMRC but make no mistake, access to that list is very much controlled and regulated by the FCA.
When the regulator published its first consultation on new capital requirements in CP12/33 over three years ago, it estimated that between 14 per cent and 18 per cent of Sipp operators would choose to leave the market. Consolidation hasn’t yet happened to that extent, perhaps as the proposals have been relaxed, but the breadth of investment options available in the market has been significantly restricted.
Competition between full Sipp operators was supposed to drive that consolidation but instead they now find themselves increasingly being forced to compete with platforms. That’s a fight that no full Sipp operator would choose, and the likely outcome is the same via a different means: consolidation.
As recently as five years ago there were predictions that Sipps were going to take over the pension world. That’s not going to happen, not now that other pensions have been given the same rule book.
Back to basics
If this all sounds like a rather gloomy way to start the new year then think again. A full Sipp market growing on the back of excessive sales of unregulated esoteric investments was neither intended nor was it sustainable. Before it was discovered as a soft target for double-digit commission fuelled sales of overseas property ventures, the full Sipp market did some things rather well that first led to its popularity. Here are just two:
UK commercial property
After considerable debate UK commercial property has been classified as a standard asset by the FCA. That is good news for advisers and has prompted a huge sigh of relief from some Sipp operators. It means there will be more providers from which to choose.
Discounting faux properties, such as off-plan hotel rooms, equatorial plantations and land banks, there are probably between 12,000 and 15,000 commercial properties owned by Sipp investors. Although this appears to be a success story, Sipps are only scratching the surface of the potential of the UK commercial property market. This is a market where over 100,000 properties are transacted every year but in which Sipps only account for 1.5 per cent of them at best.
Expertise, correct first time and delivered by a human
The flat fee charging structure of most full Sipps means that only pension funds upwards of a reasonable size find their way in. By their very nature, larger pension funds not only tend to come with a wealthy investor together with their adviser but also with more complex problems.
They’ve normally been accumulated over a number of years, through different regimes and schemes. Pension protection is already into double figures and a change to tax relief may complicate things further.
Advisers value the pension technical expertise that is concentrated in Sipp providers, particularly when larger legacy providers have allowed theirs to decline while others are uninterested in complex business that does not easily fit their system or requirements.
On 6 April 2015, pension savers found that their newfound freedom to access their pension funds was, in fact, rather regulated. It took them longer than expected to do what they wanted to do, but most of them got there in the end. Sipp operators are equally heavily regulated but they still have a good deal more freedom to operate than most.
Those who focus on where they can excel and offer a competitive advantage to advisers will continue to prosper.
Greg Kingston is head of communications and insight at Suffolk Life
