The future of bespoke Sipps

This article is part of
Self-invested personal pensions – April 2015

The future of bespoke Sipps

It suddenly seems a distant memory but not long ago the talk of the pensions world was of the intensifying regulatory assault on Sipps – particularly bespoke Sipps. It seemed almost endless. Then the pension freedoms were announced and the mood lurched suddenly from doom and gloom to dizzy optimism. What should calm heads make of it?

The issues that lead to the now-forgotten pessimism were never universally spread throughout the industry. They weren’t always well understood either. But most significantly, they haven’t all magically gone away. That is worth thinking about; history is all very interesting but what we should learn from it for the foreseeable future is of more practical value.

The pension freedoms rightly brought something of an adrenaline rush. But they, too, are worthy of deeper thought. Pension rules no longer mean the same thing for all providers as it does for all clients. How providers respond and what they have to offer will differ.

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Under the carpet

For a while now, sweeping statements and conflation of various issues have made it difficult to tease out exactly what has been going on. As a simple example, to what extent are the new capital adequacy rules about;

(a) increasing the level of capital held;

(b) addressing “regulatory arbitrage” (in the FCA’s words) to correct the levels held;

(c) using capital cushions to compensate for the issue of toxic investments?

I’m not going to trawl over capital adequacy. Suffice to say the FCA chose to persist with its own approach.

Implementing it is now the issue, particularly for bespoke providers – some providers are covered under different regimes such as Solvency II for insurers.

Platforms would appear to be in a particularly good place as their whole business is built around execution, custody and valuation of investments. These are also among the core ingredients for discretionary fund managers (DFMs). If they haven’t already put them in place, bespoke Sipp providers will be scrambling to put data feeds in place to provide regular, automated valuations for those parts of their portfolio.

The trouble is that a data feed is no silver bullet. The capital adequacy rules fall on Sipp operators – there is no corresponding obligation on other parties to cooperate.

The concept of standard and non-standard assets is particular to Sipp operators’ new capital adequacy rules – it is not something already built into their systems.

They already have to meet platform and DFM regulatory duties such as those under ‘client money and custody assets’, at considerable cost, no doubt.

Then there is the question of how Sipp operators will handle that data and what the capabilities are of their systems of varying age and sophistication. Until now, many bespoke Sipp operators have avoided costly duplication of platform and DFM records by simply recording a portfolio value.

By contrast, many non-standard assets held by more flexible bespoke Sipps are at least easy to identify. Without wishing to poke the hornet’s nest of defining non-standard commercial properties, they can be identified by key attributes such as whether there is a mortgage or a tenant. Other non-standard investments such as unquoted shares are similarly easy to identify and not “lost” within, say, a platform portfolio.