Sipps: The countdown to 2016

The past 12 months in particular have also seen alterations for the self-invested personal pension (Sipp) market. In July, the FCA sent a letter to chief executives of Sipp providers suggesting most operators failed to undertake “adequate” due diligence on high-risk, speculative and non-standard investments.

Non-standard investments have prompted a continuing debate within Sipp providers, especially commercial property. August saw the regulator announce on Sipp capital adequacy requirements along with the news that it would be adding UK commercial property to the standard asset list. The FCA stated that providers will have to hold at least £20,000 in reserve by September 2016. The amount has been met with debate, as expected. Although it may not seem a large amount from the outset, some providers could find it difficult to hold that amount in reserve.

But John Fox, director of Liberty Sipp, says, perhaps surprisingly, that it may not be the smaller Sipp providers who suffer as a consequence. “This belief that large is good is a fallacy. There are a number of smaller firms that have good financial resources and management and they will have a big advantage over the larger firms come September 2016.”

“If people believe that smaller firms being taken over by larger ones with crumbling admin systems and turnaround times of 20-days-plus for a basic enquiry is good for consumers, then they are living in the land of make believe. If the FCA hopes that consolidation will happen then it will be to the detriment of consumers who fall into the clutches of these unresponsive, non-customer-focused behemoths.”

How effective?

Mike Morrison, head of platform marketing at AJ Bell says, “As the proposals for capital adequacy for Sipp companies move towards their conclusion we will have wait to see whether there is further consolidation in the market.

“I do wonder how effective the new rules will be at dealing with issues brought about by investing in investments that subsequently fail,” he adds. “The lists of standard and non-standard investments are not without some issues regarding interpretation, particularly for commercial property.”

The 2016 deadline has been set far enough ahead to allow for further mergers or takeovers to be completed without rushing. There has been plenty of consolidation over the past year. In January, Mattioli Woods acquired IFA consolidator Bellpenny’s pension administration business for just £1. Elsewhere, the Rathbone Sipp was sold to Curtis Banks on 31 December 2014. Barnett Waddingham has also been active in the market, having acquired Chase de Vere’s Sipp and SSAS business for an undisclosed figure in September. The move saw Barnett Waddingham add 250 Sipp clients to its existing book. Earlier in 2014 it also acquired Harsant Pensions.

But acquisitions are not necessarily always a good thing. Advisers need to trust that the Sipps their clients own will not be moved around to different providers on a regular basis.

Claire Trott, head of technical support at Talbot and Muir, has seen a number of transfers on the back of this past year’s acquisitions. “Advisers are concerned where their well thought through recommendations are going to end up. People come to us as we are independent with a strong balance sheet so they know we are not going to sell their Sipps off to a consolidator.”

“We have had a number of people tell us that they are concerned about the service from the providers who are buying all these books of business, distressed or otherwise. This is because they are not convinced they are able to deal with the large influx of numbers, multiple systems and multiple offices. They are unsure who to call and often are met with a call centre mentality.”

This year’s survey covers 51 providers and 71 plans. Some notable exceptions include Friends Life and Guardian, which did not wish to contribute. Other no-shows include Ascentric, Old Mutual Wealth and Nucleus who failed to reach the deadline after multiple extensions. As ever, Money Management hopes to see each company return to October’s Sipp survey.

General overview

Table 1 gives an overview of all the providers who returned a survey and their available plans. It looks into whether it is platform-integrated or independent open architecture. Chart 1 details this, showing 18 of the 71 plans classify themselves as platform-integrated, while the remaining 55 are open architecture. Availability through a platform is a growing aspect of being a Sipp provider.

As technology moves forward, it is undeniable that the need to be on platforms will be ever more important. But a platform that happens to have its own Sipp is different to a provider that offers its Sipps on platforms. The small number of platform-integrated Sipps is of no surprise. Providers such as FundsNetwork, Hargreaves Lansdown and Transact, for example, are all primarily platforms.

Minimum investments, monthly investments and annual costs are also covered in the Table. As with previous years, they vary from provider to provider. Some plans have no minimum investments, while others can reach up to £50,000.

Table 2 illustrates growth within the industry. It covers the year to 31 December for each plan or provider. The number of Sipps set up has grown from 92,012 plans to 149,348. Previous Money Management surveys show a similar trend between the October and April editions. An important number, however, is the total Sipps lost. This has fallen by 42 per cent since the last survey – from 3,459 to 1,998.

It is important to keep in mind that there can be various reasons behind the number of Sipps lost. It could be anything from service to withdrawing from the pot. The 1,998 figure has dropped dramatically over the past few years. For example, in October 2012’s survey, 6,000 Sipps were lost.

The Table also shows that the total value in force has fallen since the last survey, but only by 3 per cent. It should be noted that some providers did not disclose their total value. The average Sipp value has also fallen by 5 per cent and now stands at £228,623.

The highest average value is from NSS Solution Sipp, at £655,000. The Hargreaves Lansdown Sipp has the lowest of £70,000, closely followed by Aviva’s Pension Portfolio plan, at £75,723.

While the Table lists just 51 providers, according to the FCA there are 95 providers actively writing Sipp business, suggesting the overall size of the market is larger. Suffolk Life has been tracking this and its latest assessment estimates roughly 1.375m Sipps in force, worth a total of £162bn.

Suffolk Life segments the market into simple (or platform) Sipps – where all investments are held with a single investment counter party – and traditional “full range” plans, with a “mid-market” section occupying the middle ground.

Suffolk Life estimates that over the past three years, the market as a whole has grown at an average rate of 15 per cent pa, but simple or platform Sipps have been the big success story, growing at roughly 35 per cent pa. The majority of Sipp providers operate the traditional full-range plan, where growth has been a more modest 5 per cent pa which, with the increase in regulatory overheads and other commercial factors, Suffolk Life believes will be putting significant pressure on some of those providers.

Table 3 looks more in depth at capital adequacy and how many providers are ready for the regulator’s requirements. Martin Tilley, director of technical services at Dentons, says the need to ensure an operator has sufficient capital to administer an orderly wind up is not disputed – and there was a need to review and increase it among providers.

“However, the capital adequacy proposals, aside of requiring all Sipp providers to increase their capital reserves, are also causing additional complications. Firstly, as the method for calculating capital adequacy is based on asset value, there is a new need for Sipp operators to accurately value their assets every quarter from the end of 2015.”

He says while this is thought of as not much of a burden if a Sipp holds standard assets only, traded on a daily basis, valuations are still required each quarter and the operator needs to make sure no non-standard assets have been acquired.

He adds, “The additional administrative costs have to either be borne by the Sipp operator, reducing profit, or passed on to the client.”

The Table asks providers what percentage of the requirement would be covered if the rules were currently applicable. Although, as the rules are not due to come into force until September 2016, it is a purely hypothetical question asked to see what percentage of business would be covered. This year, 23 providers failed to disclose or said it was not applicable to their business. While there is still 18 months to go until the rules are in place, it is still worth pondering whether investors should be worried about providers with non-disclosure or less than 100 per cent at the moment. Just three providers would fail to meet the requirements should they be applicable now – Rowanmoor (70 per cent), Attivo (73 per cent) and Liverpool Victoria (85 per cent).

Rowanmoor’s head of pensions technical services, Robert Graves, says it is “disappointing” that the FCA has persisted in retaining assets under administration as the metric for calculating an operator’s capital adequacy. “Although the original formula for the calculation was adjusted, the revised formula continues to disadvantage smaller firms – small being measured by numbers of plans as opposed to assets under administration.”

“Given the diversity of investment holdings within Sipps, this exercise will be onerous not only for operators but also investment entities such as stockbrokers and investment platforms to supply the values in a timely fashion,” he adds.

Elsewhere, Patrick Van de Steen, managing director of proposition and marketing at Hornbuckle, says, “The new framework will help to keep the cost of participating in the pension market at a point that sustains customer-beneficial competition. We expect that the disclosure of a Sipp provider’s capital adequacy position will become a requirement for all providers in due course.”

Under debate

The Table also looks into a much-debated area of Sipps – non-standard investments. There are no rules regarding how much of a Sipp can be in non-standard assets, but holding them can cause liquidity issues and can eventually end up costing more. Commercial property is one area on which the regulator has been ruling, stating that UK commercial property would be moved to the standard asset list.

But the industry has been torn, with some arguing it cannot be considered as standard investment because of liquidity issues, and others claiming its popularity should be enough to qualify it as a standard investment. Of all respondents, 15 classify it as a standard asset, 7 as non-standard, 24 did not disclose, while nine respondents said it was not applicable.

Following a freedom of information request by John Moret, founder of Sipp consultancy MoretoSipp, the FCA released figures that show the number of non-standard investments in Sipps sits at £1.24bn, £220m of which was in overseas commercial property – UK commercial property, now classified as standard, has £3.1bn. The amount of non-standard investments (excluding UK commercial property) totals less than 5 per cent of total assets.

Table A details the charges and the number of properties a Sipp holds, in hotel rooms, UK property, overseas property and land.

For Hamid Nawaz-Khan, chief executive at Alltrust, when it comes to the suitability of investments held in Sipps, providers and trustees need to consider the type of investment and the amount a client chooses to invest – and beyond the scope of what the HMRC rules state. “This makes sense for any number of reasons, not least of which are prudence, a balanced approach to risk and the maintenance of liquidity that ensures the smooth operation of the plan.”

The key is combining the role of provider and trustee, he says, which would presuppose an overriding view on acceptable investments and levels of risk with the interaction of financial advisers.

The next few weeks will see a complete overhaul to the retirement industry. Retirees will be able to access their pension pots as freely as they wish, and the charges will be important in attracting new investors. Charges as a whole remain largely unchanged over the year, and they vary hugely across the board. Table 4 shows fees for initial set up charges, annual costs, transfers in and out and whether there are any transaction charges. Part of looking at costs includes looking at different retirement options. Table B details whether a plan is phased, capped or flexible drawdown and any charges that come with that.

Talbot and Muir’s Ms Trott says, “Although the majority of Sipp fee schedules are easier to compare than a SSAS schedule, there are still differences with terminology and timings of fees, which can be confusing. The use of time cost charges is also still an issue for advisers trying to establish how much a fairly simple transaction could cost them.”

She says the worst element is usually when it comes to property charges, where some providers charge on a time cost basis, others have low headline fees with a multitude of additions and some have all-inclusive fees. “The issue of add-ons is something that cannot be entirely avoided with property due to the different areas that need to be charged for each case.”

Some pension providers have stated they will restructure their fees in light of the changes, and others already have in order to remain competitive. But Ms Trott says advisers should be careful. “These seem to be a case of moving fees around rather than actually making it any cheaper for the client.”

Platform or bespoke?

“Sipps run by platforms tend to make the majority of their money from the assets under management whereas a bespoke Sipp provider who is independent of the platform or DFM will make their money from just the administration so are likely to have more explicit fees.”

The cost of transactions can change by asset type. Table 5 looks at the different types of investments allowed in each plan, from overseas commercial property to hedge funds to off-plan hotel rooms. As with Table 4, the asset allowances do not tend to change often. We also asked providers how many plans they have that hold just one asset and what their due diligence process is. One allowance is bank accounts and Table C details the plan’s account provider and rates available.

The next 18 months are undoubtedly going to be challenging for Sipp providers.

In the run up to the capital adequacy rules coming into effect, the 2014 Budget reforms will also make a difference to the pensions landscape. Now the need to have an annuity has been abolished, advisers need to find the best pension options for their clients.

But Robin Nimmo, strategic insight manager at Royal London, says, “The 2014 Budget is likely to have less impact on Sipps than other pension products. This is because Sipps already offer drawdown which can facilitate flexible withdrawals from a plan.”

While this may be true, there are still some issues when it comes to the reforms. Dentons’ Martin Tilley says the larger picture, however, should

be beneficial to Sipps and operators. “The proposed changes have generally given pensions a positive press and I would hope lead to greater pension funding.

“While at the lower end of the market, some clients with smaller pension funds may be liquidated to cash, the majority of Sipp investors have larger funds to which managed withdrawal under flexible access seems well suited.”

And the winners are Neil MacGillivray, head of technical support unit at James Hay, says, “There will be three winners out of these changes: advisers, platform providers and, most importantly, members of a personal pension. But all will be reliant on breaking away from the traditional views of sourcing income in retirement.”

Although it is still early days, the coming months will be crucial for pension providers. All eyes will be on the annuity providers, but focus should not stray from other products. The Sipp still has a long way to go until September 2016, and the survey in October should provide further insight into how providers are preparing.

The full impact of retirement freedoms will be seen and hopefully a better idea of how it has affected different types of pension will have emerged.