PensionsMar 23 2015

Where to stand in the standard debate

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Where to stand in the standard debate

Since self-investment was first offered to pension investors through small self-administered schemes (SSASs) in the late 1980s, directly held commercial property has been a stalwart of the asset classes, popular particularly with the owner-managed business keen to use their property funds to own the premises from which the business would trade.

While there have been economic cycles when popularity has waned, demand for the asset class has been strong of late and this now follows into Sipps, which since 1995 have grown in popularity to such a degree that the bespoke versions outnumber SSAS by a ratio of around six to one.

Is a house a home?

The definition of commercial property is simply that which is not residential and, as a result, the range of these assets is wide. As well as the expected industrial units, offices and retail premises, Sipp investments can be diverse, from fisheries to fire stations and boathouses to bistros. Indeed it would appear that only the imagination limits what might be an acceptable commercial investment.

Unfortunately, the imagination of some investment promoters has been working overtime with some of the promoted investments into the likes of biofuel plantations and off-plan developments being little more than scams. Even some of the better structured arrangements have failed and when this does happen administrative problems for the holding Sipp operator occur.

This was obviously in the mind of the FSA when it first penned the consultation document proposing to increase the levels of capital adequacy for Sipp operators in November 2012. Its publication, CP12/33, sought to divide asset classes between those regarded as standard, and all other asset classes deemed as non-standard. The publication went on to contend that non-standard assets might significantly increase the costs of a Sipp operator in a wind down scenario and as such should command a premium leading to the need for a higher level of additional capital adequacy being required depending upon the percentage and value of such non-standard asset held.

The industry’s consultation response is well documented as is their challenge to the FCA, which published PS14/12, based on the new capital framework of the originally proposed value and designation of assets held, but the one notable amendment from CP12/33 was the redesignation of UK commercial property as standard rather than non-standard asset.

PS14/12 states, “Consultation feedback, further informed by our thematic work in the Sipp industry, has led us to agree that normally UK commercial property can be transferred between pension providers at relative ease.”

Key to the point in question is reference to the transfer of property rather than its sale as may have been implied in the definition of standard assets which refers to the need for the asset to be realised within 30 days.

The amendment came with a caveat, which was that if the Sipp operator had reason to believe the transfer could not take place within 30 days, it was required to treat the property and value of it as a non-standard asset.

It is this caveat that has split the industry and now creates uncertainty, a matter that must be addressed before the end of this calendar year so as to ensure Sipp operators are applying a consistent approach to existing and new business.

This could otherwise lead to distortion in the market both in terms of the need to hold capital but also in how pricing of UK commercial property business might evolve in the future.

Mission impossible

So how important is this 30-day period and how easy is it to achieve? Let us first explore the likely options that might occur in the event of the need for an orderly wind up.

The first option is a block transfer of the Sipp operator’s business as would occur in a sale or merger. One option here is the purchase by the new operator of the winding up Sipp’s trustee company. In this event, the trust company in whose name the property is most likely registered is simply absorbed into the new business and no physical transfer of title is required. It would seem in this instance that the 30-day rule would be irrelevant.

The alternative is physical transfer of title of the property between the old and new Sipp operators’ trustee companies. Some commentators have questioned why the 30-day period should remain as such while calendar timescales may be part of the equation, surely it is the hourly time actually taken and thus the cost to the Sipp operator of the transfer that is important. Where a block book of business is being transferred, when would the 30-day period be deemed as commencing? It is logical to assume that the process would be managed over a period of weeks or months and thus quite possibly each property would have its own staged start date.

So what factors need to be considered in determining if a property can be transferred in the 30-day period?

Outright ownership

If a freehold or long leasehold UK commercial property is held unencumbered by mortgage and without rental debt, the process required to transfer the property includes suitable due diligence of the property by the receiving scheme, suitable due diligence of the new provider by the holding Sipp operator, appointment of conveyancing solicitors and the completion of a TR1 transfer of property form.

Notification should then be made to interested parties such as the tenant to confirm the new account into which rental payments should be made – and from what date – and to whom contact should be made in respect of the new landlord.

Although there are still several parties involved in this process, providing all parties are willing and can operate to respectable turnaround times, the transfer of a property should be achievable within 30 days. Where the property might be part of a block book of business this should be even more achievable as saving of time through economy of numbers might be possible. Additional efficiencies such as using the same solicitor for all cases might also streamline the process.

Mortgaged ownership

Where a lender has a charge, unable to be satisfied before transfer, additional parties become involved. The transfer of property to a new legal owner will require the mortgage lender to at best assign the borrowing but more likely redocument and possibly reassess the lending proposition.

Their approvals and documentation team as well as their own solicitors being willing, will add time to the transaction and may give the ceding Sipp operator reason to believe the property transfer could not complete within 30 days.

More complex arrangements

Property ownership can be in many forms. A long leasehold may require the approval of the superior landlord before a transfer of lease can take place. Some property ownership is fractional through syndicates where transfer may require documentation to be completed by other syndicate members. Such situations may also lead to the transfer extending beyond 30 days.

It can be seen then, that the number of parties required to participate in the transfer process – and their willingness and speed to act – will have a direct bearing on the decision as to whether a transfer can meet the FCA’s 30-day deadline.

What the industry needs is a consistent approach – perhaps with some degree of guidance. From who this guidance might come is as yet uncertain. It is unlikely to come from the regulator and the divergence of treatment within the industry is also unlikely to yield a common consensus opinion.

Martin Tilley, director of technical services, Dentons Pension Management