How modular approach will puts Sipps in to the mainstream

This is partly due to product innovation over the past couple of years, according to Chris Smeaton, head of product development at James Hay Partnership, which recently introduced the Modular iSIPP to give advisers and their clients a far greater degree of flexibility.

This product’s building block approach enables individuals to add to the standard offering by purchasing separate modules depending on their requirements. For example, they can pay extra to access everything from commercial property to specialist investments such as unquoted shares.

“The main benefit is that people only pay for what they use,” he says. “If they have very basic requirements of a SIPP product then they will only have to pay a small fee. However, if they have more complex needs and require a lot of investment flexibility then the charges will be higher.”

The idea behind it came when James Hay Partnership realised that people faced the prospect of paying upwards of £500-a-year for their SIPP, but in many cases were still putting it all in to collectives, meaning they were paying far too much for a very simple product.

“We felt the modular approach was a much fairer way to structure a SIPP offering and we believe this is the way the entire market is going to evolve,” he says. “The product can grow with the customer so they don’t have to switch into something else every few years.”

In many ways it’s a very simple solution. The Modular iSIPP, for example, can be accessed for £180 per annum. “A customer can buy a SIPP with us and know that it will be flexible enough to meet their needs – whatever happens in the future,” he adds. “They don’t need to buy a complex product at the outset as their SIPP can adapt and change in line with their circumstances.”

Mr Smeaton believes innovations such as the modular offering emphasise that we’re at a fascinating stage in the SIPP market’s development. In fact, he suggests it’s like sweet and sour, with a number of positive drivers counterbalanced by challenges to really test providers.

First let’s look at the positives.

“SIPPS are more popular now than they’ve ever been and have come in to the mainstream due to their flexibility, and because providers have improved technology and reduced costs in order to make them more acceptable to a new breed of customer,” he says. “Our Modular iSIPP is only £180 per annum for the core iSIPP, so you don’t need to be super rich in order to afford one of these pensions. They also provide a lot of flexibility in order to meet the ongoing needs of an adviser’s client.”

Another influential factor has been social change.

“People have become a lot more investment savvy and aware of financial products over the last few years,” he says. “The rise of comparison websites has led to an increase in people doing their own research when it comes to products such as holidays and insurance.”

This is affecting their approach to other financial products. “Advisers and customers are more aware of what’s out there and have better tools and abilities to compare,” he says. “A number of forward thinking providers have started to innovate around SIPPS to make them more relevant and flexible.”

The introduction of the Retail Distribution Review is seen as a big positive for the SIPP market as it gives players a level playing field in a previously Life Office dominated space. “All of a sudden SIPPs are being viewed on a like-for-like basis,” says Mr Smeaton. “In many cases advisers and clients are realising that a low cost SIPP can be more efficient than a traditional pension.”

In addition, a SIPP benefits from flexibility and functionality, meaning people can choose whatever investments they favour. Whether they feel more comfortable in basic areas such as cash and tracker funds, or want exposure to gold bullion and commercial property, their needs can be met.

“The sheer breadth of investment options is remarkable,” he adds. “There’s no other product that gives the same level of flexibility. In addition, pensions

still offer excellent tax benefits to individuals and have consistently proved to be the most efficient way to save for retirement.”

The sour aspects primarily concern increased regulation – and there’s certainly no shortage of rules and obligations facing providers.

“The complexity of how they have to work, such as the reporting requirements and the need to have tight controls in place, can be a concern for them,” insists Mr Smeaton. “All SIPP providers need the financial resources to invest in their businesses and have robust controls and procedures in place.”

Then there is risk management. “Being able to provide business continuity for clients can be a real challenge for providers with relatively small turnovers,” he says. “For a larger company like us it’s not an issue as we’ve had structures in place for years that enable us to quickly set up in another location.”

A raft of further concerns will make their presence felt this year, such as the requirement for SIPP providers to produce key features illustrations. For those without established and automated online processes, the work involved in copying and sending out these documents will be immense.

“Under rules concerning the provision of information, SIPP providers will soon need to send an increased amount of information directly to the end client such as corporate actions and the reports and accounts of underlying investments held ,” adds Mr Smeaton. “Again, this will be a massive undertaking for those without automated processes in place.”

Adding to the concerns are the stringent capital adequacy requirements. “As well facing the additional fixed costs of IT and staff to cope with the increasing regulation, they also need to hold more capital,” he points out. “This need to invest at the same time as holding more capital is a double whammy that will be a challenge for many small or unprofitable providers.”

This, he suggests, is why the industry expects some of the smaller SIPP providers to either pack up or be swallowed up by larger rivals. Such issues may not cross the minds of the end investor, he adds, but they need to be considered by advisers as part of their due diligence process.

There’s a list of questions to ask prospective providers: How profitable are they now? How strong are they? How resilient are they to regulatory changes? Are their businesses scaleable – both now and in the future?

“They need to decide whether the SIPP provider in question will still be here in five years’ time and making money,” he says. “The last thing they want to do is put their customer with a pension provider that’s going to fall over in a year’s time, leaving them to find a viable solution. The choice of provider is arguably more important than the investment choice as it’s fundamental to the process.”

As a business, James Hay Partnership is certainly in a strong position to comment. With 44,000 schemes, £14bn under administration, and the last full year’s accounts showing a profit of £11m, it can certainly lay claim to being one of the largest, strongest, and best capitalised providers.

“We’re in an excellent position compared to many other SIPP providers,” he says. “There are more than 100 in the market and while a lot are excellent, some are not good enough, and for independent financial advisers looking for a partner firm this should be a concern.”

As far as Mr Smeaton is concerned the keys to success will be service, product innovation and information technology. “We have already got the building blocks of being well capitalised and profitable but those three will be vital for us to continue meeting our customers’ needs,” he says.

Demand for such services, meanwhile, is likely to remain strong. “As technology is improving costs are coming down and SIPPS are more accessible to the man on the street,” he says. “They increasingly have mass appeal and the market for them is definitely growing.”

While Mr Smeaton has discussed a number of issues – both positive and negative – with regard to the SIPP market, he is anxious not to appear gloomy about the outlook. In fact, he remains resolutely upbeat about the prospects for growth over the next few years.

“I’m very positive about both the SIPP and platform markets,” he says. “They have revolutionised retirement planning and are far more accessible than ever before. The only caveat is that smaller, weaker players will struggle so advisers need to align their businesses with the right companies.”

Chris Smeaton is head of product development at James Hay Partnership