Self-invested personal pensions (Sipps) have become a mainstream pension product in recent years and provide greater freedom and less rigidity than traditional pensions. Available products range from low-cost Sipps and transactional-based Sipps, through to the bespoke Sipp at the other end of the spectrum, the latter of which can facilitate a much wider investment choice.
With over 100 Sipp providers currently in operation, the selection for financial advisers of the most appropriate provider to meet their clients’ needs has become increasingly complex and bewildering.
At one time, cost featured highly in this selection process and, although this is still an important area, financial stability and service are now regarded as higher priority, especially with the FCA announcing it will publish long-expected capital adequacy guidelines in Q2 this year. Meeting these proposed requirements will potentially have a major impact on the Sipp industry and we cover this as a key area for consideration below.
The FCA has also been busy with a third thematic review in almost as many years. The regulator has identified inadequacies in financial resources, risk identification and mitigation of assets in the schemes, and in operational procedures. There is a concern that a number of Sipp providers operating on very tight margins may not be able to satisfy the regulatory challenges ahead. Previous reviews highlighted insufficient controls and processes from some Sipp providers, and also noted the high concentrations of non-standard investments that some held within their book. An FCA spokesman recently commented that certain providers will have to “improve procedures or cease certain activities.”
The financial adviser therefore needs to carefully consider the choices to be made when selecting a Sipp provider. The following are some key areas and questions that advisers should consider.
A number of Sipp providers in operation today are not believed to be trading profitably. In view of the capital adequacy proposals and the latest FCA thematic review, it is therefore of paramount importance the chosen provider is financially stable. Consistent profitability is a good indication of a well-run company with strong financial controls in place.
Another consideration is whether the Sipp provider has access to sufficient cash reserves to actually meet the new capital adequacy requirements. The FCA wants to ensure that, should a Sipp provider cease trading, they have enough capital in place to enable them to continue to operate long enough to transfer all their investments to a new provider. However, insisting providers hold this extra funding - which in many cases will be significantly higher than required by current levels - may actually have the impact of forcing some Sipp providers to cease trading.
How core are self invested pensions to the provider’s main business?
With the fairly imminent higher capital adequacy requirements - and in some cases due to a high proliferation of non standard assets within their Sipp plans - some providers may decide that the costs and risk to their core business are too high and choose to exit the market or sell to another Sipp provider. In fact we have already seen several providers pull back from allowing certain non-standard asset classes to advisers and their clients. This causes uncertainty for clients, and advisers would do well to consider this aspect.