Sipps survey: A new dawn

But regulatory scrutiny has increased. The FSA has stipulated that poor providers with bad management must pull up their socks and conduct better due diligence on their investments - although such vagaries make it hard to identify who is actually causing problems.

Its capital adequacy paper, however, will affect all providers. The regulator’s new calculation places far greater emphasis on ‘non-standard’ assets, the thinking being that – in the event of a wind-up of a Sipp operator – these assets would be more difficult to sell on or transfer.

Few Sipp providers will go unaffected if the current proposals go through. Chart 1 shows the percentage of plans surveyed that accept each non-standard asset type, ranging from 24 per cent allowing investment into off-plan hotel rooms to 66 per cent accommodating commercial property. Although some investments are clearly more niche than others, it is plain that many Sipp providers will feel the impact of an altered capital regime.

“If implemented as proposed, it is likely that some Sipp providers will be faced with the choice of changing their charging structure or business model, altering their range of permitted investments or perhaps looking at pulling out of the market,” says Billy Mackay, marketing director at AJ Bell. The scope of impact will depend heavily on the split of standard and non-standard assets, he adds.

But it would be wrong to say that Sipp providers allowing investments into riskier assets are in themselves inherently more risky; a whole range of factors come into play, including the proportion of esoteric assets and the level of due diligence performed. The whole point of a full Sipp is to provide access to a broad variety of investments; if certain options become unviable for the vast majority of firms, the industry may as well have a permitted investments list.

“[So-called] non-standard assets may need to be restricted in future or priced accordingly,” says Richard Bean, SSAS and Sipp business development consultant at AWD Chase de Vere. “True Sipps may become something of a rare commodity.”

Choice...for now

At present, ‘full’ Sipps are most common, as shown in Table 1. This may of course change once the regulator gives its final judgement.

As well as detail on product scope and platform links, the Table shows which capital regime providers fall under. While some are beholden to other regulatory regimes, operators broadly must at present hold either six or 13 weeks’ capital. A total of 20 plans reported being under the six week regime – although many said they held an excess of the capital required – and a further 30 did not disclose their position.

The jump between six weeks’ expenditure and the proposed capital requirements will be huge for some providers and could lead to the widely predicted consolidation of the industry. Even in the past year, movements have begun: Alliance Trust sold its £3bn ‘full’ Sipp book to Curtis Banks in October, focusing instead on its platform offering, followed by Suffolk Life’s purchase of around 1,700 Sipps from Pointon York in November.

Both Alliance Trust and Pointon York remain active in the Sipp market, but it is highly likely that companies will use the regulatory change as an opportunity to assess which products they wish to focus on.

Others will look to sell if they cannot meet the capital requirements. But it may not be so simple. “Consolidation is not inevitable as there may be a lack of buyers,” says Andy Bowsher, director of Sipps at Xafinity. “Only those providers with the very best operating efficiencies and technical capability – and with access to capital, of course – will be interested. There has been a number of providers looking to sell themselves over the past couple of years and without success.”

Lisa Webster, senior technical consultant at Hornbuckle Mitchell, agrees. “The question remains who will want to buy these books of business, especially in cases where the due diligence on the investments has not been as stringent as with some of the bigger operators,” she says.

Tally up

Despite the ructions in the market, business is broadly up, according to Table 2. The total number of Sipps set up in the past 12 months has risen by 29,668 since our last survey, reaching 120,000. However, the numbers include data from Aegon, which did not provide figures in the previous survey, making the rise more in the region of 15,000.

According to those who provided a figure, the average amount of new business from transfers is 78 per cent. The amount of true new business is therefore much lower than the figures quoted.

The total value of Sipps in force is also showing a positive trend. The £103.2bn total value in force is up 16.5 per cent on the previous survey. Changes in participants have an impact so figures cannot be directly compared like-for-like, but this survey shows a net increase of only three plans.

Another way to measure market growth is to look at the companies that responded to this survey and the previous one. Here the data is even more impressive, showing 21 per cent growth.

Our survey only captures part of the market. Suffolk Life collates data from various industry sources showing its estimates of total growth across the market, demonstrated by Chart 2. Its key findings are that more than one million Sipps are in existence split across the three types:

• 270,000 in simple/platform Sipps, with total assets of £23.5bn and average plan size of £87,000;

• 581,000 mid-range Sipps, with total assets of £46.1bn and average plan size of £79,000;

• 198,000 in full-range, bespoke Sipps, with total assets of £52.7bn and average plan size of £266,000.

Falling short

The upward trend could soon be dashed by FSA intervention, with its previously mentioned papers potentially dramatically altering the market.

While the FSA does not make such reports without reason, there is a risk of the whole Sipp industry suffering as a result. “Bad practice could threaten the reputation of the industry as a whole,” says Andrew Roberts, partner at BW Sipp. “However, it is important to distinguish between the seriousness of the issue and the extent of the issue. GC12/12 did not do this.”

The ultimate effect on consumers is beginning to show, he adds. “The increased cost of regulation is already creating a shift away from Sipps towards SSASs and Qrops,” Mr Roberts says. “Pushing consumers to non-regulated products should not be seen as a victory.”

The combination of the thematic review and the proposed capital adequacy changes looks set to significantly shake up the industry. To attempt to assess how ready the market is, we asked providers to report what percentage of their capital adequacy requirement would be covered had the rules come into force on 1 February 2013, along with the percentage of non-standard assets.

Table 3 shows the results, with fewer than half choosing to respond. This is telling in itself - if a provider is 100 per cent ready, why would it not report it? But the point of this exercise is not to lambast those who would not meet the capital adequacy standards already; there is no legal requirement for them yet to do so. In doing this we had hoped to gauge how far the industry has to go in readying itself for the proposed changes. All this really shows us is that the majority is not prepared to show its hand. Of those that did, six out of 29 are not ready; extrapolated, that would account for 20 per cent of the market.

There has been much backlash against the proposals, particularly from smaller providers. The Association of Member-directed Pension Schemes (Amps) submitted a response to the consultation arguing that the proposals are “blatantly anti-competitive”. It analysed a scenario in which an average Sipp was £200,000 and 50 per cent of total assets were non-standard, concluding it would cost a 500-Sipp provider an additional £699 to take on one new customer, while a 40,000-Sipp provider would only need an extra £78.

“The FSA has, it seems, plucked figures from the air,” says Hamid Nawaz-Khan, chief executive of Alltrust. “Even an industry outsider reading the paper would deduce that it was pitched against the small operators. Combined with the proposed one-year transition period, they really want to make things difficult.”

All adds up

Such additional costs, for a provider large or small, will likely end up on the client’s invoice in one way or another. Charging structures across the industry are diverse and complex enough already, as shown in Table 4.

It is clear from the Table that companies take different approaches to charging. A total of 33 providers levy no initial charge, while the most expensive – Mattioli Woods – charges £895 upfront. Transfer-out costs also vary hugely, from £0 from 25 providers to £400 for @sipp.

Looking at transaction costs will be more relevant for some clients, depending on what they want to do. For frequent traders, a Sipp with no transaction charges is likely to be more appealing than one that charges upwards of £30 per trade. For others, costs associated with property purchase are more important; these can be found in Table A.

If the FSA’s proposals go ahead unchanged, many small providers are concerned they will be unable to compete on cost.

According to Taylor Patterson, meeting the challenges of governance and risk management is a major issue for small providers, which in turn has an impact on costs. “It is all part of the growing cost of regulation and with fees being driven lower, there is a real risk to our ability to remain competitive,” it says.

But cost should not be the main driver for selecting a Sipp. It is more important that the plan chosen meets the client’s needs and objectives both in the immediate future and in the longer term.

Part of this is looking at retirement options, which can be found in Table B. Although retirement may be a way off for some clients, their potential needs should always be kept in mind. For example, the Table shows that 11 plans do not offer flexible drawdown, which could be a big drawback for clients with significant assets.

Pick ‘n’ mix

Gaining access to a wide variety of investment types is key for many Sipp-holders. Table 5 breaks down the allowable investments for each plan, showing the spread of asset types investors can access. Further detail on cash accounts can be found in Table C online.

Although many plans remain unaltered on what they will accept, when comparing to the previous survey it is clear that some anxiety around esoteric assets is creeping in.

In October 2012, 32 per cent of plans said they accepted off-plan hotel rooms; now the number stands at 24 per cent. Ucis have also seen a drop from 63 per cent acceptance to 51 per cent. Commercial property, defined as ‘non-standard’ asset despite widespread objections, remains steady.

“The FSA’s view that commercial property within Sipps should be considered as ‘non-standard’ is somewhat confusing,” says AWD Chase’s Mr Bean. “A large proportion of ‘specialist’ Sipps have investment in commercial property, based in the UK, such as offices, warehouses and factories. It is our opinion that these should not be considered as non-standard assets. Otherwise, why have a Sipp in the first place?”

Robert Graves, head of pensions technical services at Rowanmoor, makes the point that commercial property is less likely to be seen as ‘untouchable’ by other operators if a transfer were needed. “The Sipp industry would argue that it does not matter that property is not liquid as it is likely that there will be Sipp operators who would take over a portfolio of Sipps holding commercial property,” he says.

Trouble ahead

The FSA’s intervention has shaken up the industry and prompted advisers to be more wary of Sipp operators. Several providers noted a ‘flight to quality’, something likely to continue as advisers ponder who will remain once the rules change.

Advisers looking to place business now must be confident that their chosen provider will remain in business; otherwise a transfer might be necessary once the rules change.

Never has there been a more important time to perform thorough due diligence – for existing clients and new Sipp investors. Everybody knows it is the adviser’s responsibility to ensure investments are suitable; Sipp operators will now come under a greater spotlight too.