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.
Challenges
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.
Old with the new
The increased stress and competition in the market has also meant that advisers are starting to take their due diligence for their existing Sipp clients as seriously as they do for new. In the independent, bespoke market in particular, recommendations that were made several years ago are now being reviewed and business transferred to a more suitable provider on the basis of new due diligence assessments. There’s no clear pattern on when that happens – it could be a trigger event of continued poor service, a regular review of the client or even a regular review focused on Sipp providers recommended in the past – but it is happening.
One trigger event for such a review is a tightening of a Sipp provider’s investment allowability. The third thematic review divided assets into two categories – standard and non-standard – and was driven by the FCA’s concerns that certain non-standard assets present a significantly higher risk of consumer detriment. Advisers have found that the investments they could make last year with their chosen Sipp provider can no longer be made today, necessitating either a change in investment strategy or a change in Sipp provider.
With business leaking away from the independent providers that now have more restrictions in place, coupled with organic new business sales falling in face of increased competition from platform providers, the financial pressures should be evident. Forced into a niche by the volume of new business being written on platforms, independent Sipp providers have seen their niche squeezed further by having to reduce their investment options. The smaller operators appear to be hit the hardest. When the regulator proposed the new capital regime for Sipp operators they were open in their expectation that a number of providers would exit the market as a result.
That outcome is precisely what’s happened, and has become another consideration for advisers when selecting a Sipp provider. The risk of failure of a Sipp business is one consideration, but equally advisers are becoming increasingly cautious about recommending a provider who may be bought or consolidated in the near future.
The selection process for a Sipp provider is therefore considerably more complex than in the past, and over the next couple of years at least, advisers will want a greater degree of scrutiny, if not for their clients then for their own peace of mind. A part of that process needs to be prepared to not accept at face value the answers provided by a Sipp provider, but to dig deeper and ask further questions on those responses.
Future outlook
Questions on financial strength need to not only look at past results but to question and anticipate future preparation for recapitalisation. Evidence of sufficient capital resource will need to be backed up with assessment of diversification of income to protect against a contracting market – and all this alongside an adviser’s ‘normal’ assessment of suitability for each individual client.
This might appear excessive work for a pension recommendation, but pensions – including Sipps – are undergoing radical changes from April 2015.
Although drawdown has been available for many years, a far higher proportion of investors are going to start selecting flexi-access drawdown over an annuity next year. That means a greater number of clients will need advice and closer management long into their retirements.
A Sipp recommendation might previously have started with consolidation of various pension pots and be expected to last up until retirement in most cases and beyond in a few more. From next year not only will more take up drawdown, the pensions will start to be passed to the next generation too.
The opportunity for advisers is tremendous, the need to make the right recommendation of Sipp provider even more so.
Greg Kingston is head of marketing and propositions at Suffolk Life
