The self-invested personal pension (Sipp) market has never been far from the headlines since it was regulated in 2006. In those halcyon days, service levels on offer were a breath of fresh air to advisers looking to break free of an insured monopoly pension market, and the wider investment options offered huge appeal. With the majority of Sipp providers offering flat fee propositions and no legacy of commission-fuelled distribution, Sipp operators offered valuable support to the then fledgling idea of fee-based financial advice. Pension liberation was virtually unknown and the more exotic unregulated investments had yet to infiltrate the Sipp market.
How things can change in just eight short years. The Sipp market has since endured three thematic reviews from the regulator, each conducted with increasing focus and pressure, and now faces its biggest challenge yet – a disruptive yet necessary recapitalisation of Sipp operators.
Different chancellors have also made their influence felt with various changes to pension income rules, culminating in George Osborne’s sweeping changes announced in this year’s budget and then again at party conference. No wonder then, that a steady number of Sipp operators have bowed to the growing regulatory and commercial pressure by selling up to stronger rivals, a trend that’s growing.
The Sipp market has now diverged into two parts (and that doesn’t include the growing direct-to-consumer operators): the platform market, effectively serving the needs of advisers with simpler, more standard investment requirements; and the independent market, mostly the original bespoke providers who continue to offer open access to the wider investment market and assets not normally transacted via a platform. The latter has seen their market share first stagnate and now dwindle, and their investment flexibility has been further restricted by the recent third thematic review together with the impending significant capital penalty required to hold non-standard investments.
The diversity of different Sipp operators and the services they provide has always presented a challenge for advisers. While increased regulation has reduced the range of accessible investments (rightly so, some would argue) it has not resulted in standardised services or charges from one provider to the next. Comparing like for like from one provider to the next remains a complex task, and now there are additional points for them to consider outside of ensuring value for money and services provided for their client.
Cost still drives the majority of advisers’ recommendations but service remains a close second. The adviser’s client pays the cost of the Sipp but in most cases, poor service results in a cost (opportunity cost or wasted office resource) directly back to the adviser.
However, those are merely filters used to draw up a shortlist of providers, at which point secondary considerations become equally important. In light of the new capital requirements arriving in 2016, assessing financial strength is more important than ever. Depending on the number and value of non-standard assets held (which can be seen in the Chart), some Sipp providers may need to increase their capital reserves many times over.
In some cases this may represent an increase equivalent to more than a decade of future profits, which goes some way to explaining why the shareholders of many smaller providers in particular have voiced their resistance to the regulator’s proposals. Advisers’ selection processes (more widely recognised as due diligence) have started to be more forward looking in order to assess how prepared for the new capital regime the Sipp provider really is.