A way to go: MM Sipp survey October 2013

But time does not stand still. Sipp business has been going on as usual – clients do not stop saving simply because the regulator is planning changes.

And the stream of Sipp books being sold has not stemmed since our last survey in April. Since then, Dentons has acquired 650 plans from RSM Tenon, Suffolk Life has acquired the Sipp books of Origen and Pearson Jones (400 and 280 plans respectively), and City Trustees, a subsidiary of Mattioli Woods, has taken over Ashcourt Rowan’s 750-strong book.

How much of this is the normal course of business and how much is prompted by potential capital adequacy concerns is unclear. There are undoubtedly some firms out there feeling rather anxious about what might happen if they cannot meet the requirements, however the calculation turns out.

Sipp providers are coming under the microscope in more ways then one. The FCA has been making noises in many areas of the market since its inception, and Sipps are not exempt. In April, the regulator censured senior management of a Sipp operator for the first time, banning Kevin Wells, managing director of Montpelier Pension Administration Services, from performing any ‘significant influence function’ at any regulated firm. He would have been fined £58,500 except that it would have caused significant financial hardship, with his actions described as a “how-not-to guide” for running a Sipp firm.

In addition, the FCA has been sniffing around Sipp providers, asking how they operate, what their due diligence processes are, how their processes work. No provider has reported feeling ‘watched’, rather that the regulator is trying to get a better understanding of how firms of all sizes work to influence their thinking.

“They may well come out with wanting to regulate different parts of the Sipp market: this is what we do for the big ones and this is what we do for the smaller ones,” says Alastair Conway, chief executive of James Hay. “The larger you become, the more corporate you become in your approach. Good practice will have become commonplace. Smaller firms will be more diverse.”

Movers and players

While further consolidation is almost certain to materialise, for now the Sipp industry continues as always. This survey covers 53 operators and a total of 74 plans. Absentees compared with the last report – JP Morgan, Nucleus, Pilling & Co, TD Direct, Walker Crips and Zurich – all cited time and resource issues for being unable to complete the survey. Friends Life has rejoined the survey with information on its workplace Sipp and Ashcourt Rowan no longer participates since its acquisition. Figures for this book are not yet included in City Trustees’. Aegon has cut down on the number of plans it reports on, choosing to only provide details on Aegon Retirement Choices and One Retirement. Not including its older products significantly impacts the total Sipps, particularly in the insured Sipp space, as shown later.

Table 1 outlines the core details of participating Sipp providers, including minimum investment requirements, current capital regime and whether there are any links to platforms. It also identifies whether online valuations are provided, with a surprisingly high number – almost a quarter – still not offering them. Whether it is appropriate to offer this clearly depends on the type of Sipp offered, since it is more difficult to provide an instant valuation for certain bespoke assets. Every plan that does not offer online valuations, with the exception of the Taylor Patterson Cash Sipp, is in fact bespoke.

The Table also shows whether a Sipp is simple, mid-range or full-range. As there are no official definitions, these figures are based entirely on Sipp providers’ own views on what their Sipp is. As broken down in Chart 1 there are eight simple Sipps, 19 mid-range and 48 full-range Sipps on offer. This does not necessarily reflect investors’ experience of Sipps; it is perfectly possible for a bespoke Sipp to be used in a simple way if, for example, only funds are selected for investment.

Chart 2, on the other hand, shows the breakdown of Sipp type by the number of plans held in relation to each, drawing data from Table 2. Several providers would not break down their Sipps into each type, hence a large ‘unclassified’ section. But comparing the data we do have, it is interesting to note that the proportion of full-range plans available is far larger than those actually taken out, giving bespoke providers a battle for business.

Defining what category a Sipp falls into is not required, but could prove useful for the industry. Robert Graves, head of pensions technical services at Rowanmoor, said there is a perception with some agencies which review Sipps that bespoke offerings are “better” as they have a greater range. Simple Sipps can be very effective in their own right, he added, and should not be rated lower as they are not setting out to be bespoke. “It would almost be better if there was a way of splitting the market up,” he says.

But drawing lines between providers would inevitably cause problems. “You might get some Sipp providers that are essentially standard but do offer commercial property,” Mr Graves says.

It has been suggested that the regulator could deliberately define the market in light of its views on capital adequacy, but then those in the grey area – particularly those who offer commercial property, the controversially ‘non-standard’ asset defined by the FCA – would have to choose whether to become more restrictive or offer more.

Business as usual?

Sipp providers are facing greater scrutiny by advisers. Chart 3 shows a poll by Liberty Sipp showing adviser opinion on providers, with all highlighting a need for greater transparency on fees. However, 63 per cent said they are likely to direct more business towards Sipp providers, a fact reflected in our survey. On the whole, business is still on an upward trajectory.

On average, the operators in Table 2 saw 10 per cent growth in their total number of plans and 15 per cent rise in total assets under management since our survey in April. Some notable companies include Ascentric, which reported a 38.8 per cent rise in assets under management from £1.08bn to £1.5bn, and Aviva, which rose by 48.8 per cent from £853m to almost £1.3bn.

In terms of total assets under management, the headline figure of this survey compared with April’s is slightly lower at £101.8bn, down 1 per cent. However, Aegon not including some of its plans had an impact on overall data – to the tune of more than 250,000 Sipps and £11.3bn in assets under management – so data for the wider industry is actually far more positive. Taking only those that provided data in the previous survey and this one, total assets under management rose from £85bn to £98bn, a jump of 14 per cent.

Having asked providers to detail the breakdown of their Sipps into simple, mid-range and full-range, it is possible to get an idea of the types of business being transacted. Some did this more enthusiastically than others – the Pointon York Individual Sipp, for example, showed 2,779 simple Sipps, 521 mid-range and 2,846 full-range – while other providers plumped for popping everything in the mid-range or full category instead. Some providers said they could not break down their Sipps into these categories and only provided a total figure.

Nevertheless, the data start to give an interesting idea of what the Sipp market looks like, with the vast majority in the mid-range category. The self-reported data from providers does not entirely match up with Suffolk Life’s analysis, which looks at Money Management data alongside other published information. Its view instead suggests:

• 299,000 simple Sipps with total assets of £28bn and an average plan size of £93,000;

• 572,000 mid-range Sipps with total assets of £46.8bn and an average plan size of £82,000;

• 211,000 full-range Sipps with total assets of £54.8bn and an average plan size of £260,000.

Considering the averages quoted in the Table can also give some insight as to how Sipps are being used. The overall average Sipp value is £247,755, some £20,182 higher than our previous survey. Some figures are to be expected – a low average from platform-based Hargreaves Lansdown at £69,000 for example, or a high average of £465,000 from Rathbone – but others are a little more incongruous. Some full-range Sipp providers that might be expected to have relatively high averages have got rather low values – for example, Carey Pensions at £104,604 and Brooklands Trustees at £100,000. Carey said this was down to its inclusion of simpler Sipps and group Sipps, which, being employer-sponsored, could technically come in with zero value.

Capital issues

Still top of the priorities list for providers is capital adequacy. For the second time, we asked Sipp providers to report on their current capital position: how they would fare on 1 August 2013 if the proposed requirements were in place. Details are shown in Table 3 and those that did not provide a response have been left blank.

The purpose of this analysis is not to highlight those that do not meet 100 per cent of the proposed requirements as poor providers; it is purely to give a reflection of the industry as it stands and how far it will have to go to be ready. Unsurprisingly, most of those who chose to respond were at the upper end, but not all. Attivo reported 46 per cent coverage and Rowanmoor reported 50 per cent.

But this does not mean a business is doing badly – Sipp providers are under no obligation whatsoever to hold the proposed level of capital at present and, as Rowanmoor’s Mr Graves points out, that capital could be being put to use. “What would be the point of holding 100 per cent of that capital today when it is not working for you?” he says.

Advisers will naturally be interested in the financial strength of Sipp providers before placing business with them; hopefully those who have not responded will be more transparent if asked to account for their position directly by advisers. Sipp operators need to be able to answer advisers’ questions about their financial position, says Martin Tilley, director of technical services at Dentons. “IFAs are more keyed in to asking about financial strength than they were a year ago,” he says.

The uncertainty is causing problems for those wanting to sell off their book or make acquisitions. Mr Tilley says not knowing what the final rules will be makes it harder to make such decisions. “No one can make plans and no one can invest properly for the future,” he says.

There has been some buying and selling of Sipp books, but nowhere near the mass consolidation that has been expected for years. Mr Conway, of James Hay, believes that it is largely down to unattractive pricing. “I think what has put off contraction of the market is unrealistic expectations of valuations of the business,” he says.

But Sipp providers that cannot meet the capital adequacy requirements might find themselves without a willing buyer. This has led to a new term being coined, with potential ‘Sipp orphans’ being left unable to operate and unable to transfer their clients to anybody else. It is unknown at present how many toxic assets sit in Sipps, but any Sipp operator looking to take over a book of business will have two aspects to consider: the cost of the purchase itself and the additional capital needed to be able to back that book. Regardless of the costs of the former, if the latter significantly increases the reserves needed, it will significantly impact on any operator’s ability to go down this route.

Costly ventures

The charges element of the survey, as shown in Table 4, remains largely unchanged. As always, costs vary hugely across the industry; choosing the right Sipp depends heavily on what the client will be using the Sipp for and what they want to access. For simple Sipps, straightforward functionality and cost are likely to be top in the consideration process; for bespoke, value for money, efficiency and service are hugely important.

Perhaps more interesting is how charges will change to reflect changes to capital adequacy requirements. Ultimately, providers have to get the required capital from somewhere; the bill is likely to land with the end investor.

The impact on charges will likely be a key driver in segmenting the industry. If operators raise charges across the board, investors utilising more basic functions within a bespoke Sipp might be better off elsewhere. With capital requirements at a provider level, the changes will impact those that offer a range of Sipp types and charges addressed appropriately.

Ideas have been floated on linking charges – or perhaps just a deposit – to individual non-standard assets. So, for example, an investor could be required to submit a percentage-based deposit when investing in a commercial property. But the deposit amount would change depending on the value of the property, adding in regular valuation fees. In practical terms, this would be difficult to apply.

Investing in everything

So far, there has not been much fallout around the impact of non-standard assets on capital adequacy. Sipp providers are clearly holding off making any major changes until the final rules are published, with the details of investment types offered by each shown in Table 5.

Some bespoke providers are reporting that they are getting more enquiries about acceptance of more esoteric assets, one such company being Rowanmoor.

“We seem to be getting more enquiries about esoteric investments, probably off the back of some other firms choosing to retract from that, potentially over issues around meeting the capital adequacy requirements,” says Mr Graves. But there was a dip in interest when the Ucis paper came out in June, he adds.

It is widely believed that the cause of delay for the capital adequacy paper coming out is because the FCA wants to get it right. As its first major piece of pensions legislation since coming into force, it does not want to mimic its predecessor in coming out with one viewpoint only to change direction several months down the line.

Denton’s Mr Tilley says the regulator appears to be taking a real interest in how Sipp operators work on a day-to-day basis, particularly on the processes for accepting certain assets. “It wouldn’t surprise me if future FCA reviews focus on that,” he says.

James Hay’s Mr Conway says the regulator is taking a much closer look than previously. “They are keen to probe you on an individual basis,” he says. “It is challenging but constructive.”

The differences between large and small companies really become apparent at this stage, he says. Understanding the technical details of how processes work is very important for the regulator – there is no point in it coming out with a set of rules if the industry turns around and says it cannot implement them, or cannot do so within the specified timescale.

Where now?

For Sipp providers, the waiting game continues. Uncertainty prevails: will the FCA stick to its predecessor’s original plan? Will it come up with a new formula? Will it scrutinise the industry even further once it has made its final plans?

Advisers must continue placing business in the meantime. That means a heightened level of due diligence, ensuring a full understanding of how the Sipp provider operates and knowing what to do if the provider were to cease to exist. No adviser wants to be in such a situation, but being prepared makes it easier to deal with.

And it once again highlights the need to be absolutely sure of what clients are investing in. Some schemes might seem perfectly reasonable until they go under, but it is worth being doubly careful. Sipp operators will be, too – if four providers out of five won’t touch something, there is probably a reason for it.