Advisers need to be careful when choosing a Sipp business because the acquisiton risks and challenges are “many and considerable”, providers have warned.
A number of self-invested personal pension (Sipp) providers have spoken to FTAdviser about the increase in consolidation across the Sipp market, transpiring in light of the forthcoming changes to capital adequacy requirements for providers set to come into force in September 2016.
The rules set the fixed minimum capital required for Sipp firms at £20,000.
It has been suggested that these new requirements would lead to a large-scale consolidation across the Sipp industry.
The regulator has also recently warned that it is ready to wind up providers which fail to meet capital requirement expectations.
Andy Bowsher, director of self invested pensions at Xafinity, said the firm has had several conversations with other providers about buying their books.
However he claimed there have often been barriers which would “be difficult to see any prudent buyer overcoming”.
Mr Bowsher said he expects to see several business buyouts, but pointed out the acquisition risks are “many and considerable”.
These risks include:
• Historic liabilities; recommendations resulting in liability have no long-stop and therefore could become an issue years later when the business is under new ownership
• Operational integration; a clash of cultures might cause key staff to leave
• Client attrition; clients and their advisers find themselves with a different provider and decide to move elsewhere
“Advisers that we talk to want a stable and long-term Sipp provider. Clients always feel uneasy when they are ‘sold’ to another company of which they have no knowledge.
“Most clients are likely to take guidance from a financial adviser and both will be monitoring service and support levels from their new provider.”
He said those clients who are in the middle of retiring or buying a commercial property are likely to be the most concerned about changes in Sipp provider ownership.
“Advisers will be looking carefully to find complimentary business to work with,” he said. “If the consolidated provider becomes ‘too big’ there will be potential for them to treat clients and advisers as a commodity and lose that personal touch and ability to react.
“Too small can mean resources are simply too stretched, no matter how willing.”
Mr Bowsher said advisers should be looking out for those providers who have aspirations to grow beyond Sipps into platforms and complimentary products, and what this might mean to their future Sipp offerings and the way in which they deliver adviser support.
Andy Bell, chief executive of AJ Bell, said there is “undoubtedly” a need for consolidation in the Sipp market, with more than 120 operators in existence and very few of them being profitable.
“The increased capital requirements are a further driver towards their being a smaller number of larger well capitalised operators.”
However, he argued there are significant obstacles to this “long-predicted consolidation”, suggesting the lack of standardised IT systems, processes and approaches to non-standard assets lie at the heart of this.
Ray Chinn, head of pensions and investments at LV, said it is difficult to predict the next consolidation, because while many consolidations to date have been around regulatory pressures, some seem to be more about strategic direction.
He said he would expect to see continued consolidation, particularly with some of the smaller Sipp providers.
“Given some of the challenges with acquisition – specifically in terms of ‘toxic’ assets – then I wouldn’t expect the pace to increase particularly aggressively.”
Over the next few years, Mr Chinn said he expected to see three or four acquisitions every 12 months.
“Advisers need to ensure that they are aware of potential acquisition activity and can guide their clients should an acquisition occur.”
He suggested the Suffolk Life acquisition may have come as a surprise to some advisers because the firm was not in distress and was in fact well capitalised.
“The clue here was the parent company’s strategy; when doing due diligence advisers need to ensure they understand the potential risks, the key numbers and whether the long term strategy is credible.
“Advisers will need to move quickly to understand the impacts of the deal and also run a similar due diligence exercise on the new provider to be able to reassure clients, or take the appropriate action.
Mr Chinn admitted LV is an unlikely candidate for any consolidation plans, partly because Sipps are a core part of the LV pension business, and because its strategy centres on growing organically.
Dan Farrow, director at SBN Wealth Management, said: “I would say there is a significant number of small Sipp and Ssas providers, mainly small firms of actuaries, who won’t be able to cope under the new regime.
“Especially those guys who have tended to allow things that the mainstream providers wouldn’t permit in their Sipps, such as private equity and other unregulated investments.
“I expect a significant number will consolidate - around 75 per cent of the market in terms of smaller businesses, which doesn’t worry me because these will be niche players. The types of investments these smaller business sometimes take into their plans are probably in the grey area.
I expect a significant number will consolidate - around 75 per cent of the market in terms of smaller businesses. Dan Farrow“I have not had clients in small providers; I like to stick them in the mainstream because I shy away from them having vanilla or unregulated products.”
Claire Walsh, chartered financial planner at Brighton-based Aspect 8, said she expected the smaller Sipp providers to consolidate next, but that all have confirmed they are preparing for the new funding requirements.
She said: “I recently reviewed a client whose pension is with a small Sipp provider and invested in an unregulated overseas investment fund which does not offer redemptions, and the Sipp provider confirmed they had lots of clients holding unregulated investments.
“I do wonder what the future would be with these Sipps as I imagine they may struggle with the new requirements, and if they are holding lots of non-standard assets then this is not going to be an attractive business to take over.”
katherine.denham@ft.com
