PensionsAug 22 2016

The 30-day challenge

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The 30-day challenge

The self-invested personal pension (Sipp) industry could arguably be considered one of the more resilient products advised upon in financial services.

Despite scandals relating to dubious property investments and the recent high number of complaints made to the Financial Ombudsman Service (Fos), sales in the flexible pension wrapper have rocketed.

In 2015, according to figures from the Association of British Insurers, the number of personal Sipps sold more than doubled to 1.7m on the previous 12 months.

From the start of next month, however, the Sipp sector is likely to see a major change to its administration: new capital adequacy requirements.

In a few weeks’ time, Sipp operators will have to show that they have put enough money aside to wind up their business, if they needed to do so, accounting for the first time for different types of asset.

The biggest change is that the Financial Conduct Authority (FCA), which is behind the moves, is stipulating that Sipp operators have to differentiate between ‘standard’ and ‘non-standard’ assets.

For any Sipp holding non-standard assets, the provider will have to hold an additional amount of capital, untouched, in its bank accounts.

Key points

From the start of September, Sipp providers will have to make provision for the different assets their products are allowing.

The standard and non-standard asset distinction is open to intepretation.

Some believe the FCA is trying to prevent future crises in relation to Sipp investments.

The FCA has said, explicitly that the reason for requesting more capital – which it calls a ‘capital surcharge’ – for the non-standard asset is because: “it will address the additional costs involved in ensuring that pension assets are held by a stable pension administrator when the existing operator exits the market.

“We are not suggesting that non-standard asset types are never appropriate for retail consumers or attempting to instate a permitted investment list.”

Standard Asset list

Bank account deposits
Cash
Cash funds
Corporate bonds
Exchange traded commodities
Government and local authority bonds and other fixed interest stocks
Physical gold bullion
Investment notes (structured products)
Shares in investment trusts
National Savings and Investment products
Permanent interest bearing shares (PIBs)
Real Estate Investment Trusts (Reits)
Shares listed on: Alternative Investment Market, London Stock Exchange or a recognised overseas investment exchange
UK commercial property
Units in regulated collective investment schemes

Source: FCA

But the vagueness of the standard investment list, due to ‘non-standard’ being partly defined as not disposable within 30 days, and the fact that anything not on the standard investment list is defined as ‘non-standard’, means that the concept is open to interpretation.

Jeff Steadman, head of Sipp and small self-administered scheme (Ssas) business development at Xafinity, said: “There are some areas where some assets are going to be interpreted as standard by some but not by others.”

A common debatable asset is commercial property, while another is a suspended investment fund. Mr Steadman added: “Some would consider that to be a non-standard requirement, and that increases the capital required. One of the questions is, are all Sipp providers treating suspended investment funds as non-standard or are some of them treating them as standard?

“If you’ve not got much capital, are you really likely to treat that as non-standard?”

Alternatively, providers could start charging more to hold non-standard assets, to compensate for the additional capital adequacy requirements.

The reason that the regulations have come about in the first place, is because some believe the FCA would actually like to see fewer Sipp companies, and safer investments.

Indeed, there has been consolidation in the past few months – July alone saw three acquisitions: Rowanmoor was bought by Hornbuckle parent Embark Group; Attivo sold its Sipp and Ssas business to Talbot & Muir; and Curtis Banks bought the Sipp business from European Pensions Management, after completing its purchase of Suffolk Life in May.

John Keenan, corporate development manager at Xafinity, said that for some, as anticipated, it is just too expensive: “Some providers will have a product that they’ve priced too keenly, and the administration to deal with complex investments is pretty rigorous. If you have those non-standard investments, you have to have some capital sitting there, and there’s a cost to it.”

In recent years, the wrappers have become controversial. In Fos’s most recent quarterly complaints figures, for April to June, those about Sipps were the most substantially upheld product, with 66 per cent of problems being seen as valid.

Meanwhile, the Financial Services Compensation Scheme (FSCS) has claimed that the reason its levy has had to be increased from original estimates is because of complaints about advice on investments bought through Sipps that have subsequently gone sour.

The compensation scheme announced in April that pensions and investment intermediaries would pay a levy of £90m in 2016/2017 to “reflect a higher average cost of claims arising from advice about investments in self invested personal pensions”.

The FSCS added: “In recent years, FSCS has received increasing numbers of claims against independent financial advisers no longer trading in self-invested personal pensions, or Sipps.

“These claims concerned advice they gave to transfer funds from existing pension schemes to Sipps. In many cases, the Sipp was then invested in non-standard assets, many of which became illiquid.”

The worst recent example of Sipps investing into unreliable assets came with the now notorious investments into Harlequin Property. Through various related companies, investors were drawn into putting money into unregulated luxury properties developed by Harlequin companies, through their Sipps.

In 2013, following warnings from the FCA and a Serious Fraud Office investigation, Harlequin Property filed for administration, leaving creditors owed up to £86m.

Many well-known Sipp providers got caught up in the problems, for example, Rowanmoor and Hornbuckle, although statements were made that they had conducted due diligence on the investments.

Claire Trott, head of pensions technical from Sipp provider Talbot & Muir, believes, despite the FCA’s cautious statements, that the new rules will have a direct impact on the kind of assets that Sipps will eventually invest in.

She said: “Every time you’re taking on a Sipp that has a non-standard asset in it, the costs increase. It’s using your working capital; the money has just got to sit there in a bank account, and you could be using it for investment.

“The flip side is that providers are charging people more to hold non-standard assets, which does strike me as particularly unfair, but they are a business and they need to cover their costs.”

She added that, despite its denials, the FCA was indeed trying to deliberately drive Sipp investors away from dubious assets through the back door with providers.

“The FCA just don’t want people holding these assets,” she said, adding she did not really believe that transferring non-standard assets to another provider in the event of a wind-up was as costly as the regulator made out. “Moving to a trust company and transferring assets is different to selling them; transferring them is just a change of name, it doesn’t put the client in any worse position.”

The FCA declined to comment.

Ultimately, some believe, the new rules could take away the reason Sipps came about in the first place.

Mr Steadman said: “There’s nothing wrong with Sipps or Ssases; [restricting investments] would take away the spirit of the original intention of Sipps, of a wider range of investment opportunities.”

Melanie Tringham is features editor of Financial Adviser