PensionsSep 24 2013

What to do if your client’s Sipp provider is bought or sold

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The increase in Sipp numbers has been well chronicled in recent years, with a particular acceleration in growth apparent from around 2007. It was from this period that Sipps fell under the regulatory scrutiny of what was then the FSA. Less well chronicled is the growth in the number of Sipp providers, which also rose appreciably from this date.

Prior to 2007, the operation of Sipps was restricted to regulated firms such as banks, building societies and insurance companies. However, with Sipp regulation came the opening of doors to enable those that could persuade the regulator they were competent to do so to establish, operate and wind up Sipps.

Regulator returns suggest that there are around 110 Sipp providers in existence open to new business. Clearly the regulatory burden for the new regulator, the FCA, is great; keeping track of and on top of this number of providers will stretch its limited resources.

Coupled with some less than favourable press reports of failed assets accepted into some Sipp portfolios, the regulator has had to react, first commissioning thematic reviews of providers’ processes and systems in place for assessing and accepting assets, and secondly a review of the capital adequacy requirements, which it felt were inadequate should a Sipp provider need to wind up their book in an orderly manner.

Trigger for consolidation?

The regulator has made it clear that the actions of some providers have been below the standard it expects and even those that previously ran a clean and tidy ship will have reviewed their asset acceptance procedures. Even where these were found to be in order, the documentation necessary to evidence that the processes are being correctly followed results in additional cost.

The new illustration requirements, now necessary for all new business, have also required capital investment into new software and processes to ensure these new rules can be met. Further requirements now also necessitate the disclosure of income derived from non-fee sources, such as interest rate trail, which in turn has led to some firms re-evaluating their business models and charging methods.

With costs increasing, some firms for whom Sipp operation is not core to their business will assess whether it is a market in which it is viable for them to continue to operate.

But perhaps the biggest driver towards consolidation in the market will be the new capital adequacy requirements. While full details of the new proposals have yet to be released, the impact on most Sipp providers could be great. Figures produced by the Association of Member-directed Pension Schemes (Amps) suggest many providers’ capital requirements will increase by around eight times.

For all but the very strong providers, additional capital will be required and this can be found through only a limited number of alternatives. For those owned by larger financial institutions, capital can probably be found from existing resources. For independent providers, raising capital would be from existing shareholder funds or, where insufficient, from external sources. For some, a requirement to increase fees will be inevitable.

For a few the exercise will be a journey too far and thus businesses are currently evaluating ongoing viability, with some already having waved the white flag and some notable acquisitions already having taken place.

Purchasing risks

If consolidation is to occur, a deal must be struck between willing parties. Where something is no longer wanted and therefore being sold, the question in any buyer’s mind will be, simply, why?

A sale process can take many forms. Two parties might agree bilaterally to enter into agreement where heads of terms are signed and the process moves on to completion, or the seller might instead choose to go to ‘auction’ where indicative bids are made, from which a buyer materialises.

Similarly, there are three methods by which a Sipp book might be transferred.

• Corporate acquisition: where the shares in the Sipp provider’s company changes hands. In this method, the self-contained Sipp book transfers along with legacy liabilities.

• Scheme acquisitions: where the transfer of trusteeship and scheme administrator’s roles of the acquired Sipp are absorbed by the buyers. The buyer does not usually acquire legacy liabilities of the seller’s companies but does acquire legacy scheme liabilities.

• Transfer of member assets: where a bulk transfer moves members’ assets from the seller’s Sipp to the buyer’s Sipp. In this method the buyer can control the transfer of assets and thus largely any transfer of scheme liabilities. This route, however, is the most complex from a client’s perspective as asset ownership physically changes to the new Sipp provider with the necessary re-registration documentation. It might also result in some Sipps being orphaned if not accepted by the new provider.

Due diligence

No deal can be struck until a suitable process of due diligence has been completed. This will be an extremely rigorous and detailed analysis and will cover the points outlined in below.

Due diligence considerations for selling Sipp books

• Viability of the business model

• Quality of the portfolio

• Investments held

• Liquidity of liabilities

• Impact on capital adequacy

• Probable retention

• Quality of data

• Operation

• IT compatibility

• Level of risk

From these deliberations will come the decision to buy or walk away and also give a true picture of the value of the transferring business to the buyer.

It may be that warranties and indemnities will be needed for information disclosure of any unidentified issues to protect the buyer’s interests and to ensure there are no unexpected surprises down the line.

The intermediary concern

The RDR has focused advisers on the importance of providing a good quality service to their clients. It will be expected that advisers are aware of the likely changes in the Sipp market over the coming years. Where a client’s provider is to be acquired, whether the acquirer will remain a suitable provider for the client’s future needs must be assessed.

Factors to consider include whether or not the new party provides the services and expertise required both now and in the future regarding investment and benefit needs.

• Is the new party expected to be a long-term player or will they themselves become a target for future acquisition?

• Does the new party have the capacity to integrate and administer the new book of business and is it a good match for their present business?

• Will new terms or fees be imposed that may be detrimental to existing clients?

A negative in any of the above areas might result in client dissatisfaction and a need to research and implement an alternative, more compatible provider.

Whether by accident or design, the actions taken by the regulator will result in the number of Sipp providers reducing significantly over the next three years. However, it is hoped that there will remain sufficient providers to continue to offer the consumer choice to invest freely, as was intended by the introduction of Sipps in 1989. But advisers must still assess operators for suitability for their clients.

Martin Tilley is director of technical services at Dentons Pension Management