Sipp cap ad proposals ‘fundamentally flawed’

The proposed changes to the way providers of self-invested personal pensions calculate how much capital they must hold in reserve contains a “fundamental flaw”, according to pension service provider Barnett Waddingham.

Speaking to FTAdviser, Andrew Leggett, head of business development for Sipps at Barnett Waddingham, said tying capital requirements to a Sipp’s assets under administration could have disastrous results.

He warned that if an underlying investment was suspended, the amount of capital the operator would have to hold in reserve would decrease, while the adminstration costs would remain level.

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This means that a situation could arise wherein the capital held by a company would not be enough to secure what was needed to wind up that business.

Mr Leggett said: “If investments are failing, the risk to the operator is increasing. If anything the capital adequacy should be increasing, it certainly shouldn’t be falling.”

Barnett Waddingham holds a large amount of property in its Sipps. However, Mr Leggett says it will not be difficult for the firm to meet new capital requirements which consider commercial property a non-standard asset.

He said: “It would increase our capital adequacy quite significantly. If we were a standalone Sipp operator it would be problematic, but currently we are not. We would not need to raise any debt or equity. We can meet it from existing resources.

“Property is undoubtedly illiquid and slower to transfer, so certainly property isn’t on a par in capital adequacy terms with funds and shares, but it doesn’t have the risk problems we see with Ucis.”

However, Mr Leggett does not subscribe to comments that the new rules could produce ‘orphan investors’ when a Sipp operator cannot raise the necessary capital yet cannot find a buyer for the product.

In fact, Mr Leggett believes Sipps operated by smaller companies who struggle to meet the capital requirements would make prime acquisition material for larger firms, due to the way the proposed capital requirements grow in reverse proportion to the size of a company’s assets under administration.

As an acquisitive firm, Barnett Waddingham is continually looking for potential deals. However, Mr Leggett says the firm has not encountered many Sipp operators looking to sell because they cannot meet the required levels of capital.

He said: “At the moment we are seeing ones that are non-core exiting the market, and the distressed ones, but there are others that are just straight Sipp operators but for some of the it’s going to be increasingly difficult to keep going.

“We aren’t typically getting approached by people that can’t meet capital adequacy.

“That could be potentially attractive because as [your assets] get bigger [capital requirements] increase at a slower rate.

“The overall capital adequacy could be less than the two separately so over time that may lead to acquisitions and that would certainly potentially be attractive to us.”

In July of this year, Dentons director of technical services Martin Tilley said the proposed requirements were shown to be ridiculous when Sipp operators substantially wrote down the book value of Harlequin investments to as low as £1.