Sipp cap ad calculation fails on investment risks

Risks to self-invested pension firms from illiquid and esoteric investments that would be time consuming and costly to unwind could persist in spite of an overhaul of the capital adequacy regime announced earlier today (4 August), according to one provider.

This morning the Financial Conduct Authoity published its long-awaited new rules on the capital Sipp firms will have to hold in reserve, more than a year and a half after draft proposals were first published in November 2012.

The new regime will comprise of a £20,000 minimum as originally proposed, with an assets under administration calculation determining the exact amount and with more capital required to be held against so-called ‘non-standard’ investments.

Amid fierce lobbying and concerns over the number of businesses that might be cast adrift with no willing buyer, the FCA watered the rules down by ‘softening’ the calculation for smaller firms with less than £200m and U-turning on plans to classify commercial property as ‘non-standard’.

The final rules have received a broadly warm welcome across the market, but Suffolk Life’s head of marketing and proposition Gregory Kingston warned that persevering with an assets under management calculation failed to address risks with esoteric assets.

Citing a number of Sipps invested into ‘unsuitable’ assets, often with relatively small fund sizes, Mr Kingston said: “If systems and control requirements are not sufficient to guard against this sort of business then there’s a risk that neither does the proposed new capital calculation.”

He added: “It may be that the number of non-standard assets, rather than their value, remains the more appropriate - and therefore safer for consumers - means of calculating capital requirements.”

The comments echo concerns raised by providers including Suffolk Life and rival Dentons last year, after a smaller Sipp firm wrote down the value of Harlequin property assets from tens of thousands to just £1 after it entered administration.

Martin Tilley, director of technical services at Sipp provider Dentons, highlighted that in such cases - or others where values are low - capital reserves may be low or even negligible, while the cost of actually having to administer a wind up and transfer of investments could be high.

The industry was generally supportive of the changes, with Claire Trott, head of technical support at Talbot and Muir, stating it was no surprise that commercial property will be considered a standard asset.

She said: “Property, although an illiquid asset, is clearly standard for most well run Sipp providers and we agree with the FCA that it should be treated as such.”

David Fox, director of sales and marketing at Dentons, stated that while the FCA took their time over issuing the results, they are well thought out and fit for purpose. “They have considered the industry comment and feedback and it is good to finally have certainty in the sector.

“The impact on well run and well capitalized Sipp operators will be minimal but where we might see increased fees and change is around the lower cost platform Sipps where the levels of asset monitoring will be greatly increased,” Mr Fox said.