As we approach the first anniversary of the pension freedoms, many will be looking around the market to see which products have been the biggest winners. A quick glance through this survey might tell you that self-invested personal pensions (Sipps) could be in with a shot at winning first prize. The amount of Sipps set up in the past six to 12 months has been phenomenal.
The headline figures in this survey reveal that Sipps are growing at a rapid pace. The number of plans set up has risen by 11 per cent year-on-year, and is a massive 97 per cent higher than October’s results. Chart 1 shows the growth of the total number of Sipps over the past two years using each of Money Management’s biannual surveys.
This could be due to people investing at different stages of the year, or it could be down to another reason – panic. Fidelity recently revealed it saw a 203 per cent jump in Sipp contributions in February this year compared with the year before, amid Budget concerns. The figure usually rises around April, but Fidelity believes pre-event speculation around the chancellor’s speech this year has made inflows rise rapidly. It reported a rise of 41 per cent in the last week of February alone.
But it is not just platform-only Sipps that have seen an increase so far this year, full and traditional Sipps are also seeing a rise in interest. Claire Trott, head of pensions technical at Talbot and Muir, says, “The beginning of 2016 has been particularly busy, with our best February on record. I don’t believe this is all to do with fears related to the Budget because the majority of Sipps established involve transfers from other pensions. We have seen an increasingly strong interest in commercial property, which I am sure is partly to do with it being a physical asset and not linked to the volatile stock market.”
It should be kept in mind that all figures are as at 31 December 2015 unless otherwise specified, so inflows this year will not be included in any data within this survey.
The next six months will be undoubtedly difficult for many smaller Sipp providers with a high percentage of non-standard assets. The September deadline has been looming for nearly two years, so all providers should theoretically be prepared to have the required amount in reserve. But due diligence is also key. Last year’s ‘Dear CEO’ letter from the FCA suggested there are still some operators failing to undertake ‘adequate’ due diligence.
The numbers
This year’s survey covers 74 plans across 53 providers, up from 67 plans from 50 providers in October’s survey. Money Management sends the survey to more than 70 Sipp providers with over a month to respond, and we hope more will return the survey in October.
Although it should not necessarily be the first port of call, charges are very important to many advisers when it comes to picking a Sipp plan. Table 1 looks into charges, including initial charges, annual management charges and transfers in and out. Overall, the figures have not changed a great deal since October’s survey, and they tend to increase very gradually. While service is an important factor in picking a Sipp provider, the charges also play a large part and can easily put clients off.
Table A looks into retirement options available and any other charges associated with a plan.
Gareth James, head of technical resources at AJ Bell, makes an interesting point in the run-up to the FCA’s requirements. “Will some providers look to increase charges to cope or will any firms restrict investment to the FCA’s standard asset list to manage the financial requirement? Only a limited number of clients will be affected by the latter as the vast majority of Sipps only invest in standard assets. Any increase in costs will be more widely felt and less welcome, particularly if the increase has no impact on those with Sipps not holding esoteric investments.”
Commercial property is one of the biggest attractions of Sipps. It is one of the asset classes most used within full Sipps, but it should be noted that many platform-only Sipps do not offer property as an investment.
For years, there has been debate surrounding whether or not commercial property should be classified as a standard or non-standard asset, but the FCA has declared it should standard, provided the transaction can be completed within the allocated 30-day period.
Table 2 looks in depth at charges for holding commercial property, covering allowable types of property as well as the number of properties among providers who offer it as an investment.
The number of properties has increased from 22,072 in October’s survey to 26,529 this year. The increase is of no surprise considering its popularity. The average property value has also risen slightly, as can be expected in the current market. In general, property fees have not changed dramatically, with few providers changing their figures at all.
As it stands, not many providers offer overseas properties, but it has been strongly rumoured that many providers still own Harlequin properties. Harlequin took £400m from UK investors and failed to build the majority of its properties abroad. But it should be kept in mind that this is a very rare case and the majority of commercial property purchases for Sipps have been successful.
Backbone of the industry
Chris Smeaton, director of commercial and strategy at James Hay, says although it is complex to administer, commercial property has been the “backbone of the Sipp industry” since inception and has caused little concern over the years. “If one Sipp provider goes out of business, it simply comes down to the cost of transferring it from one arrangement to another and that’s not particularly costly.”
Talbot and Muir’s Ms Trott agrees that property is – and probably always will be – one of the true bespoke Sipp investments. “Over the years, we have seen some of the mainstream pension providers try to compete in this market and many have failed. We have seen restrictions put in place to try to discourage the investment in commercial property by some providers, such as restricted borrowing, joint purchases, as well as not allowing the purchase of certain type of commercial property such as bare land, even if it is a good investment.
“These providers, who will already have clients with commercial property, should make it easy for them to transfer out should they want to access any of the things that have been restricted since they opened the plan, but we are not seeing this.”
Ms Trott says that some providers are charging “extortionate” transfer out charges, and this is mainly because they are percentage-based and properties tend to be of a high value.
Table B details charges associated with commercial property for each firm, including joint purchase fees, annual charges and borrowing fees.
Commercial property is the one asset that has caused the most debate following the FCA’s capital adequacy consultation. The rules, which come into effect this September, mean providers will have to keep a set amount (minimum £20,000 although this will be far higher for larger firms) in reserve. Table 3 details how providers are coming along with the FCA’s requirements. We asked providers to tell us, if the rules were currently in place, what percentage would be covered. All providers that disclosed this figure are now at 100 per cent, although many declined to tell us their figure.
One notable provider is Rowanmoor, which previously did not declare, but is now at 100 per cent. The reason behind this was purely because it is not required until September this year, rather than not actually having the capital. Robert Graves, head of pensions technical services at the group, says the board recently made the decision to move the money aside before the September deadline to “dispel any rumours”, and prevent others jumping to any wrong conclusions.
While some may just be holding back company-sensitive information, it could also be seen as worrying for firms that are not yet at the 100 per cent (or plus) mark. The next survey will use data up to 1 August 2016, so we hope that all providers will tell us their capital adequacy amounts then.
The Table also notes the percentage of non-standard assets, and more specifically commercial properties, that the providers class as either standard or non-standard. This can give an idea of how operators will be continuing to classify the assets.
At the time of press, the FCA has still not unveiled what would happen should a Sipp provider not meet their capital adequacy requirements.
Capital adequacy
Talbot and Muir’s Ms Trott says the problem with capital adequacy rules is that they do not relate to real issues providers could have if they want to wind down their business in a reasonable and controlled fashion.
She says, “A provider would not actually sell all the investments should there be an issue with administration. In most cases the scheme itself would remain intact and the trust company would move to a new scheme administrator.
“It is right that it looks at those assets that may put the rest of the members at risk, such as those suspended or those that don’t deal frequently, but this wouldn’t stop the trust company being moved to a new owner so should be addressed in a different way.”
Table 4 looks into the assets that firms do not allow. It can be assumed that all providers accept all standard assets. The Table also looks into whether or not plans will be allowing non-standard assets after September. The majority will, although there are still some non-disclosures.
Guy Young, partner at Nigel Sloam & Co (operator of NSS Solutions Sipp), believes clients may be penalised where an asset in their Sipp suddenly becomes non-standard, for example if a share were to become delisted. “The client may find themselves in a position where the fees for operating the Sipp increase substantially (as a result of holding a non-standard asset) through no fault or control of their own,” he adds.
Growing numbers
Table 5 looks into business levels and shows growth within the industry. It looks into the number of Sipps set up and, importantly, the number of Sipps overall.
This year’s survey shows the amount of new Sipps has hit 166,201 (October’s figure sat at 83,955). However, this amount has been slightly offset by the amount closed in this survey. It has risen 62 per cent on October’s survey (6,788) to a total of 11,044 Sipps closed. This figure could simply be put down to more providers disclosing the information compared with October.
The number of Sipps set up is vastly different when they are separated into full Sipps and those that define themselves as platform-only. Full Sipps (independent architecture or DFM-only) saw 52,574 plans set up, while platform-only Sipps saw 113,627 set up (Hargreaves Lansdown alone accounted for 58,590).
The amount lost is not as vast, at 3 per cent, but it should be kept in mind that neither Hargreaves nor Standard Life disclosed the information. Full Sipps saw a total 12 per cent lost. The types of Sipp are very different and while it is easy to compare them all against each other, the way they operate varies widely. Platform-only Sipps tend to invest predominantly in funds and cash and are easier to set up, while full Sipps have more complex investments involved – such as the Sipp favourite, commercial property. So it is no surprise that when it comes to the number of overall Sipps, there are far more platform-only plans than independent open architecture. Table C shows the cash accounts for each Sipp provider.
The rise of platform-only Sipps has met with much debate.
Greg Kingston, head of marketing and product at Suffolk Life, believes platforms have been the main beneficiaries of the past year’s pension freedoms. “Downward price pressure continues in the platform market though, so one wonders how much of this business will actually be profitable.”
Platform-only Sipps can also be related to offering Sipps direct to consumer, which overall has the industry agreeing that it should not be available. Elaine Turtle, director of DP Pensions and Amps (Association of Member-directed Pension Schemes) committee member, says there is still a large number of people who want the flexibility to run their own Sipp and not have to take advice. “As time goes on and especially as they come to take benefits, they should take advice to ensure they are obtaining the best outcome and not face high tax bills or unintended consequences from their decisions.
“We have seen a number of clients decide to use the Pension Wise service rather than appoint an adviser,” she adds. “If a Sipp is set up for a property purchase then this is usually where an adviser is involved.”
Changing market
Table 6 gives an overview of all providers who returned their surveys looking at each individual plan and detailing how it is classified (independent open architecture, platform-only or DFM), minimum charges and whether a firm has any external assessment or service standard accreditations.
Consolidation has been one of the hot topics since the announcement of capital adequacy. Many have been speculating whether or not smaller providers will sell their books after not being able to afford to continue business. So far, there have been fewer sales than originally expected, but they are still happening. In January this year, Curtis Banks announced the purchase of Suffolk Life for £45m, acquiring around 26,500 Sipps.
Suffolk Life’s Mr Kingston adds, “L&G’s acquisition of Suffolk Life back in 2008 was a signal that larger insurers wanted a piece of a fast-growing Sipp market. Now, eight years on, it is entirely likely that L&G’s decision to exit the full Sipp market (with the sale of Suffolk Life) will signal similar actions from a number of other larger insurers too.”
When it comes to mergers, Hamid Nawaz-Khan, chief executive of Alltrust, believes the FCA has an objective to “push small providers out of the market”, hence the capital adequacy requirement. “The formula has no relation to any of the risks or concerns raised by the FCA for the market and is the most stringent of all operating presently. This has already led to considerable consolidation to the detriment of the market and the consumer, and it pushes out specialist providers like us.”
Nigel Bennett, sales and marketing director at InvestAcc, agrees. “We expect further deals as some providers may struggle to meet the level of capital resources required under the new rules. The regulator appears to have been successful in its aim of reducing the use of Sipps to access certain investment types, particularly those it deems non-standard.
“We believe this will only continue as providers deal with the issue of identifying, monitoring and reporting non-standard assets, as well as ascertaining their market value, which may be difficult,” he adds.
The future is bright
Whether or not there are more acquisitions to come, there is not much time for them to complete in advance of September’s deadline. It may just be a case of waiting to see what happens and if any providers fail to meet their required amount of capital.
With just five months left ticking on the clock until September, there is still some time to go, and our next survey in October should give more insight into how providers are positioned.
