Sizing up Sipp sellers’ cash needs

    Sizing up Sipp sellers’ cash needs

    One of the most written-about subjects in the world of self-invested personal pensions over the last three years has been the regulator’s review of, and increased requirements for, the capital reserves to be held by Sipp providers, but it is from this month that the new requirements are starting to noticeably affect the relevant firms.

    It was known well before the issue of the original consultation CP12/33 in November of 2012 that changes would be required, possibly fuelled by one or two Sipp provider failures. At the time, the capital adequacy requirements were simple. It was necessary to hold either six or 12 weeks’ operating expenses depending on whether client funds were held and controlled and all parties, Sipp providers included, agreed that this level would be inadequate to permit an organised wind-up of the business should this be required.

    The first consultation received 57 responses, including one from the industry’s trade body the Association of Member-Directed Pension Schemes, which responded taking into account the views of many of its members as the proposals made were controversial to say the least.

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    Rather than basing the new capital adequacy levels on a firm’s number of Sipps or a greater proportion of costs, the regulator (by this time the FCA) proposed to use a formula taking into account the value of assets under administration with a premium based on the proportion of Sipps that hold non-standard assets.

    The FCA took some time to consider the responses while collecting more data from research and supervisory visits, and in August 2014 released PS14/12, which confirmed the use of asset values to determine the new capital adequacy benchmarks but also revised the list of assets that were to be treated as standard/non-standard.

    Notably, direct commercial property, one of the most prevalent assets held within Sipps, was in the main switched across to the standard asset list. The deadline for meeting the new benchmark was set as 1 September 2016, and the value of assets is to be determined by taking an average of assets under administration within the Sipp providers’ book over the preceding four quarters, and this is why data collection period could now be relevant.

    Recognising continued feedback on the difficulties of administering the data for calculating the new benchmarks, the FCA released a further document, CP15/19, in June this year, which eased the administration burden to some extent, allowing the use of the most recent annual valuation of an asset rather than accurate quarterly valuations at the quarter dates.

    While going some way to reducing costs of calculation, they are still considerably higher than under the previous regime, notably as each operator will have had to undergo an extensive data cleansing and categorisation process on all AUA so as to be able to evidence an accurate calculation of its capital adequacy requirements.

    CP15/19 also attempted to simplify asset categorisation, easing the definition of ‘securities’ and deposits which effectively incorporated some previous non-standard assets into the standard asset category. One area that required some guidance but which has not yet been addressed is the definition of directly held UK commercial property.