Warning Sipp consolidation could harm industry

Warning Sipp consolidation could harm industry

Consolidation of the self-invested personal pension market due to incoming capital adequacy rules could harm the sector and be bad for consumers, Murray Smith of provider Mattioli Woods has warned.

Speaking to FTAdviser, the sales and marketing director at the firm admitted Sipp providers need to operate on a much sounder financial basis.

He said: “The Sipp market has been very successful on one hand, but on the other hand this has meant that providers are operating and administrating assets into billions, and carrying capital to be able to operate for just a short period is woefully inadequate.”

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Incoming regulatory action is aimed at addressing concerns around the financial footing of Sipps, with providers just months away from the introduction of the FCA’s new capital adequacy retirements in September.

From then, Sipp operators will be required to increase their minimum capital holding from £5,000 to £20,000, which is intended to cover the cost of winding down an operator in the event of financial difficulty.

Additional requirements will apply to firms that offer non-standard assets.

But Mr Smith suggested the FCA is using the new capital adequacy requirements to spur consolidation and create a market that has a smaller number of larger players that are easier to regulate and control.

Some Sipp providers could be faced with tax-led liabilities around certain assets, leading them to fail or be unable to meet the new requirements, he said.

“This would not be an acceptable scenario for the marketplace, and certainly not for those consumers,” Mr Smith told FTAdviser.

“We need ongoing dialogue between the Sipp industry and the FCA, and possibly HM Revenue & Customs as a prerequisite to help the transition of the sipp market to a new and stronger foundation for the future.”

Robert Graves, head of pensions technical services at Rowanmoor, agreed that exiting the market may be a problem for firms if the assets they hold within their portfolios are unattractive for a prospective purchaser.

Prospective purchasers will be prioritising meeting their own capital adequacy requirements, rather than using up capital on an acquisition that will further increase their capital adequacy requirement, he said.

“A further ramification is that some firms who have previously allowed non-standard assets, may have had to make the decision to only allow standard assets going forward to limit a potential increase in their capital adequacy requirements.”

Mr Graves also said it could be strategically challenging for some firms, particularly smaller ones, to compete in a sector of the pensions market that already has established firms offering low cost and high tech access to standard assets.

“Clearly any collapse of Sipp firms due, directly or indirectly, to the capital adequacy requirements will be damaging and knock consumer confidence, particularly if it results in consumer detriment and therefore needs to be prevented if at all possible”, he said.