Cash has always been favoured in risky times. When the recession hit, some fund managers moved the majority of their assets into it. This filtered down to investors and cash holdings soared.
Huge losses when markets crashed led many to become more risk-averse and seek safety, typically meaning bonds and cash. When government bonds lost their inherent safe-haven status at the time of the eurocrisis taking hold, cash became a more and more attractive prospect.
But the return gradually dwindled and with interest rate cuts from the Bank of England it dropped further. Add to this the rising inflation levels in the UK, with the consumer price index (CPI) increasing again in July to 2.6 per cent compared with the same month last year, and the picture is not pretty.
Those waiting it out in cash are, more often than not, facing losses in real terms, unless clever management is used and they are willing to lock into fixed-term accounts. Many are not, saying they are waiting it out to find a good investment and so want liquidity.
Safe haven
The SIPPs world is equally affected by this trend, with more investors sheltering in cash than before. However, it is still not an area that advisers get involved in, with many not even being aware of the return their clients are getting.
It’s an issue that was touched on in research by Investec Specialist Bank earlier this summer when it looked at cash options in the platform market and found that, while advisers would welcome more options and better rates, the enthusiasm was not overwhelming.
Fewer than a quarter of those questioned wanted better rates on platform cash accounts, despite saying that on average they held 5.7 per cent of assets on wrap accounts in cash. With a market that represents £16.8bn, this means more than £950m is dwindling in cash accounts.
If this same percentage holding is applied to SIPPs it means, according to the data in the most recent Money Management survey, more than £5bn of the £88.6bn in SIPPs is held in cash. What’s more, the Investec research found that average cash holdings for advisers, including off-platform assets, were nearer the 10 per cent mark. If this is applied to SIPP holdings it means a whopping £8.9bn could be in these accounts.
Assessing the damage
Looking at Table 1 we can see what each provider offers in the form of cash accounts and how restrictive they are. Some providers vary between their products, meaning that 68 are listed.
Of these, just six offer a minimum rate and none of these is above the current base rate, the highest being Liberty’s at 0.25 per cent. This mechanism worked better when rates were high, with most SIPP providers offering a certain figure below base rate, for example base rate less 0.5 per cent. However, when this leads the investor to zero return, as it has for more than three years, and there is no safety net, it becomes a problem.
The rates offered are also not compelling, with 14 of those listed – less than a fifth – currently offering the base rate or higher. This is broadly in line with March’s survey, meaning providers are showing no signs of shifting, although the situation is not getting worse.
Even though these firms are offering the base rate or higher, in many instances this is reliant on investors meeting minimum requirements. For example, Ascentric only offers its top rate of 0.65 per cent for those with more than £250,000 in the cash account, while those with £50,000 or less earn the measly rate of 0.05 per cent.
Getting low
Low rates are a big issue, but not as bad if there are other options. SIPP providers, predominantly those that offer low rates, argue that rock-bottom rates do not have a big impact because the accounts are only used as holding zones for money waiting to be invested or from assets that have just been sold. These providers say those that want to hold cash longer term in the SIPP will use other accounts, including fixed-term options.
The argument does not hold true when looking at the financials that back many SIPP providers. For a long time many have taken a margin on cash accounts, skimming off some of the interest paid by banks and making a decent buck.
A glance at any SIPP provider’s annual accounts and some swift calculations on annual fees and the size of the book can show the deficit in revenue, which is largely made up by skimming interest.
However, moving to an account that pays more is not possible for investors with 21 of the SIPPs in Table 1, which do not allow investment into other accounts.
Providers are broadly split down the middle on whether they take a margin or not, with 31 doing so and 34 passing on the full amount. Of those 31, just 10 state what the actual sum is, with others saying it varies depending on the rates offered by the banks and to clients at the time.
Worse than this are the companies that refuse to disclose whether they retain interest or not. In an era of transparency on fees and costs, it seems this could be the next area that the FSA cracks down on. Indeed, in a consultation paper in March this year, the regulator proposed more transparency.
It stated that some disclosure documents fell short, with providers having no obligation to disclose the extent to which they receive bank interest.
However, the regulator stated, “We are proposing to require information, about interest retained and commissions received by the firm, to be disclosed alongside the necessary information about fees, costs, charges payable and bank interest rates receivable by the client.” At the time the FSA stated that it wanted the rules in place by the end of the year.
Understandably the industry was not impressed, saying the move was treating SIPPs like packaged products, which they are not, while also not achieving the goal of making SIPP products more comparable. The cost involved in producing new, clearer key features documents will not be small. Many predict the FSA’s estimates of £100,000 for the industry is too low.
Regardless, if it increases transparency for clients and makes advisers’ jobs easier then surely it will be good in the long term. Many argue that the margins taken on cash are a form of charges, so clients need to be aware of them.
Revealing it
Cash rates will continue to come under more scrutiny in coming months. The FSA is looking more closely at the SIPP market in general and with RDR bringing an intended era of transparency, it seems certain that this area will not be overlooked.
While the base rate has fallen, the assertion that providers are no longer making large margins on bank accounts is repudiated by some.
John Moret of More2SIPPs says, “I don’t think it is right that core margins are that small as providers can still generate a significant amount of revenue from a margin of 1 per cent.” Simply because providers are paying out low rates to investors, does not mean they are taking low margins themselves.
That said, this is fine as long as it’s disclosed. Much in the same way as commission works – as long as it’s made clear and understood by clients, then they know what they are getting into.
At the moment there are too many companies hiding behind “not disclosed” and not revealing the true extent to which they are cashing in.
But advisers have a role to play too. Rather than considering cash the client’s domain and an area they should not be involved in, they need to start scrutinising returns, maximising profit and holding providers to account.
