PensionsSep 23 2015

Sizing up Sipp sellers’ cash needs

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      CPD
      Approx.30min
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      CPD
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      CPD
      Approx.30min
      Sizing up Sipp sellers’ cash needs

      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.

      As mentioned, PS14/12 re-categorised this as a standard investment unless the Sipp provider identified that it would take longer than 30 days to transfer the asset in question, in which case it should be deemed non-standard. CP15/19 tried to clarify this by stating that the asset should be “capable” of being transferred within the 30-day period.

      By its own admission, the document confirmed this would be a “broad judgement” which will be left in the hands of individual Sipp providers. The worry here is that an inconsistent approach by Sipp providers as to what is capable of being transferred or realised could result in operators with very similar books of business categorising property assets differently, which could result in very different levels of capital adequacy to be required. This potential for a difference could result in the meaningful comparison of each firm’s capital adequacy and thus reassurance of ability to administer client schemes in the event of a wind-up or disposal being flawed, and in a worst case scenario, the artificial reduction in the levels of capital reserves being required.

      The impact on Sipp providers will of course vary across individual firms, but there will be few if any for which the new benchmarks’ requirements are lower than under the old regime.

      It is estimated that some firms with a particularly large proportion of non-standard assets might see capital reserve increases of 500 per cent. In recent surveys most, but not all, Sipp providers claim to already meet the new benchmarks, but ensuring each has a robust methodology for calculation would be wise.

      Capital adequacy is of course only one issue that advisers and their clients will need to consider when assessing the suitability of a Sipp provider. Financial strength, however, can be a good indicative factor. In a market which is constantly changing due to economic, legislative and regulatory pressures, a strong provider might be better able to react quickly to change, to adopt new features, develop and update administration systems and technology.

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