Investments  

Snapshot: Sipp evolution leads to a brighter future

It would be an understatement to say that the self-invested personal pension (Sipp) market is experiencing a period of evolution.

A concerted focus from the regulator – thematic review work originally carried out by the FSA and subsequently continued by the FCA – on the core mechanics of the Sipp market has meant that providers operating in this space have been compelled to undertake a fundamental appraisal of their business model and their product/service proposition.

Advisers should make themselves aware of the key findings and recommendations from the thematic reviews, but ultimately the regulator was not impressed by the level of risk being taken by some providers and the lack of processes to underpin core Sipp business disciplines.

They have felt the need to introduce a new capital adequacy framework for the providers operating in the Sipp market.

But with the final unveiling of the FCA’s new regulatory framework for Sipps, in the form of a Policy Statement, not due until the second quarter of 2014, we are all still debating the outlook for the Sipp market in 2014/15.

Market consolidation

Defaqto has long predicted that the high number of providers operating in the Sipp market (our research database currently covers more than 80 Sipp brands) was unsustainable and would reduce over time. This market contraction has needed a catalyst and it is expected that the FCA’s Capital Adequacy Policy Statement will drive market consolidation. There have been early signs that this will be the case.

However, as with many things in the Sipp market, this will not necessarily be straightforward, due to:

 Fringe activity – Some smaller providers, which also run financial planning arms, have decided to call it a day in order to focus on their core activities and this has seen the sale of their Sipp business book to other providers in the market.

 Cherry picking – Rather than full-on M&A activity, we have seen some Sipp providers seeking to target a specific segment of another provider’s book of Sipp business. This behaviour could continue, with providers being keener on the acquisition of Sipp businesses comprised of ‘Standard’ assets, as defined by the FCA, as opposed to ‘Non-Standard’ assets.

 Lengthy process – Anecdotal feedback from the market suggests that due diligence processes on potential Sipp business acquisitions can take anything up to 12 months or beyond to complete. Deal conclusions and timeliness will ultimately be dependent on the price and business fit being right, but nowadays they are also reliant on the purchaser company’s comfort with the Non-Standard assets that are being acquired.

Sipp administration fees

The core administration fees associated with Sipps are the establishment fee, annual administration fee and investment transaction fee. Defaqto has seen average fees for each of these disciplines decrease in recent years across all segments of the market, due to:

 Market pressure – The level of core Sipp administration fees will remain under pressure for commoditised Sipps due to the high level of competition for business in this segment of the market.