The future of bespoke Sipps

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.

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.

Toxic investments

The same cannot always be said of Ucis. The lamentably high incidence of toxic investments among Ucis and close substitutes – and the unjustifiable attempts to limit the scope of poor advice – are well-aired as, hopefully, is the point that they are concentrated in pockets.

Less well understood is that some platforms have accommodated such investments, not just bespoke Sipp providers who can at least easily identify these direct holdings (including, no doubt, with four quarters of nominal valuations in some cases).

Freedom and flexibility

Before that drags us down, let’s turn to the promise offered by the pension freedoms and consider whether the flexibility of bespoke Sipps will help or hinder.

The new rules obviously apply to all pension arrangements – whether flexible or ‘lite’, the Gad shackles are removed and costs such as setting and reviewing limits are gone. The way Sipps can respond to new financial planning opportunities will depend significantly on investment types held, the ease of valuations (needed for calculating lump sums and lifetime allowance usage) and the costs.

After a standoff over pricing, fees are now out in the open. Enterprisingly, this sees a continuation of the different pricing models of platforms versus bespoke. Increasingly, platform Sipps are “free”, often including drawdown options, with everything covered by the platform fee. In general terms this is likely to work out cheaper for lower fund values but at a certain point fixed fees will be more economical.

Not what you expected

Pricing models don’t provide the insight you might expect. There are reasons to choose platform or bespoke Sipp not related to price – investment and client management tools on the one hand, bespoke investments and a different service model on the other, for example.

Bespoke investments are not necessarily non-standard in capital adequacy terms – for example, at least some commercial properties. Taking that example, though “standard”, properties are nonetheless not cheap or easy to value. A commercial property valuation might cost £1,000 and could be considered current for six months.

Even with a large fund and a handsome yield, that’s too much cost and not enough latitude to phase benefits every month in a tax-efficient combination of lump sum and taxable income. Ironically, the flexibility to invest in property means that a decision will have to be made as to whether the financial plan has to bend to the investment or the investment be given up.

The new rules applicable on death may well encourage Sipp property investors to stick with their investment with the thought of potentially passing it on tax free or using the yield to support income payments, as the case may be. So it can be speculated that they are likely to take their pension commencement lump sum in one go or in very few tranches, willing to compromise on gross roll up.

Another paradox is that an investment that is non-standard for capital adequacy could be quick, easy and cheap to value, potentially making phased drawdown just as economical as for a platform Sipp. Term deposit accounts, including those with terms longer than 30 days – and so potentially non-standard – remain a feature of many Sipps.

Finally, there is at least one area where investments can be “standard” and at the same time bespoke and offer the potential to make phasing economical. For the larger funds typically found in bespoke Sipps, DFMs will offer a full discretionary service and may well target a natural yield to meet the member’s income requirement.

With a data feed in place and if there are no other hard-to-value assets, bespoke Sipps could be in a similar position to platforms to develop a slick phased drawdown solution.

Other background factors like the thematic reviews and capital adequacy have, directly or indirectly, been pressing bespoke providers to invest in technology – in systems, controls and automation – and changing the dynamic between platforms and bespoke Sipps.

Andy Leggett, head of Sipp business development, Barnett Waddingham