All change

However, this appears to no longer be the case, with the data in this survey showing stuttering growth and a drop in scheme numbers. The industry has hit a bump in the road, and how it will navigate it remains to be seen.

In it to win it

This year sees the largest survey yet, but as ever there are a few that did not take part. Those that did not respond but did last year are Aviva, for one of its products that is closing to new business; Attivo, whose SIPP Account has moved to Intelligent Money; and Alico, which said the business is being transferred and only has fewer than 60 customers anyway.

Skandia said that no information has changed since March’s survey and it does not have the additional information we requested, while HSBC is not actively promoting its SIPP, so does not want to be included. Other providers that have not appeared simply did not respond to our repeated requests for information.

Table 1 gives the overview of providers taking part in this year’s survey and all their available plans. This year sees the largest number of providers taking part, with the survey capturing around half of the estimated 120 providers.

With capital adequacy being such a talking point in the industry at the moment, this time around we have asked providers what regime they currently operate under. For investment management or insurance firms this is slightly different, as they have overriding capital adequacy requirements, but for SIPP firms this usually boils down to either six or 13 weeks.

The data in this survey shows stuttering growth and a drop in scheme numbers

Of the 60 firms that revealed their regime, 34 hold 13 weeks of operating money, while 14 hold just six weeks. The remainder have other capital adequacy regimes.

While there has been much talk about the FSA’s moves on capital adequacy and speculation in the industry has been rife as to what level the regulator will raise the requirement to, there have been no official lines released. The FSA says that while it is a badly kept secret that it is looking to reassess the capital requirements of SIPP firms, it has never confirmed this officially and has yet to release any papers on it.

But this does not stop the industry speculating, with proposals widely expected later this year, although implementation is not likely to come until 2013 and even then may be phased.

The consensus appears to be that six weeks of capital adequacy is not enough, meaning that 14 of the survey participants may face tougher times ahead. That said, some stated that while they work under a six or 13-week requirement, they actually carry more capital than that.

Beyond the consensus over the deficiency of six weeks, divisions begin to show. It has been suggested that capital adequacy should be based on the risk-level of the business. This means that if a SIPP allows investors free rein to select Unregulated Collective Investments Schemes (UCIS), off-plan hotel rooms and other esoteric investments, it would have to pay more than a simple SIPP that offers access to cash and a few open-ended investments.

Talbot and Muir appears to agree saying, “The increase in capital adequacy for SIPP providers is down to a handful of rogue companies that have flouted the rules, and while this is frustrating we hope that it will filter out some of the smaller players who are not on the FSA radar and may be potentially volatile.”

The principles behind linking capital requirements to investments make sense: a firm with a riskier book will take longer to sell and is more likely to run into problems if one of the underlying investments fails. But by apportioning capital adequacy based on underlying investments it could be said to restrict the flexibility that SIPPs offer. Firms would be less willing to allow investors to put their money in exotic investments. A shame, since flexibility is the main tenet under which SIPPs were set up.

Capital adequacy is predicted to be a big game changer in the SIPP market. Consolidation has been predicted for years, with market revenues not high enough to support the burgeoning number of firms present. However, it has never really materialised. A few small buyouts were made, but movement has now stalled.

Obviously firms are reluctant to buy when they are unaware of the liabilities they are taking on. If capital adequacy does become based on the risk in the business then they may face a huge hike in costs for the business they have bought. Even if it is based on weeks of operating profit, this presents a potentially large increase in available funds.

However, some believe that the entire capital adequacy debate misses the point.

Barnet Waddingham says that instead of holding an arbitrary sum of money, “a practical solution would be to make it easier for an existing book of business to be sold without potential liabilities falling on the purchaser for the investments taken on”.

The concept of being able to cut out problematic assets and pass on scheme members without esoteric investments was another solution from the provider.

Meanwhile, Chris Jones, proposition and marketing director at Suffolk Life, says, “Consideration should be given to requiring capital to be held separately, so that it is preserved and available in the event the provider gets into financial difficulty.”

Rising and falling

Table 2 has the data detailing growth in the SIPP market and how each company is growing its business, or not as the case may be. This time around we have requested additional data from providers on the new business written in the past 12 months, how much was lost over the same period, and what percentage is from transfers rather than true new business.

The headline figures show £88.57bn of in-force business. This is only marginally more than the £88.49bn recorded in the March survey and does not show the growth the market has become accustomed to. Between October 2011 and March 2012 there was 6 per cent growth in in-force business, with a near 15 per cent rise in plan numbers.

This time the number of fully self-invested plans has increased from 499,960 in March to 549,866 now. The average value of a SIPP has also risen from £182,589 in March to £203,684.

Granted, as there have been changes in the providers taking part and those willing to disclose data, the figures cannot be compared like-for-like. That said, some providers that did not participate this time, such as Skandia, did not disclose data earlier this year. And while some smaller providers are missing, there have been additions to balance this out. The survey shows worrying signs for an industry that has typically enjoyed strong year-on-year growth.

Looking at the data for the past 12 months raises other concerns too, in that some providers are not taking on much new business, while others are actually seeing attrition outweigh newcomers. James Hay, for example, lost 1,703 new schemes in the first six months of the year, while it only gained 1,046. The background to this has been well publicised. Tim Sargisson, managing director, tells us that the fall relates to its book of business: it is an older SIPP provider and so has more clients who either buy an annuity or die. Another reason is that the company has moved away from being third-party administrators, so has seen attrition because of this.

Dentons is another that has seen high attrition rates in the past year, losing 52 schemes although it has gained 242. However, Martin Tilley, director of technical services at Dentons, says this is due to actions by the firm itself. Every few years it carries out an assessment of scheme members and if scheme assets are below £50,000 or investors are not using the SIPP’s facilities, it approaches them to ask if another product may be more suitable. This inevitably leads to some clients leaving due to, what Tilley terms, a “proactive purge of the client bank”.

Attivo is another firm that has lost a considerable percentage of its new book, saying this was also due to decisions on the company’s part. “This is predominantly as a result of us requesting that an IFA move his business away from us as we had concerns over the investments that the client base was making.”

However, industry-wide, far more SIPPs have been gained than lost. While 90,332 new schemes were written, just 6,000 were lost, so 6.6 per cent. One issue, however, is that much of this ‘new’ business is far from this.

The average rate of business from transfers is 81 per cent, meaning just 19 per cent of this new business – 17,163 of the 90,332 schemes – are true new customers. This leads to a lot of double counting within the industry. If provider A gains a client one year this is counted as a newcomer to the SIPP market. If, in the next 12 months, that client leaves provider A and moves to provider B then this is counted as new business again, even though it is the same assets and investor moving. This is part of the reason it is so tricky to gauge exactly the true new business in the industry.

Taking this ‘true’ new business figure of 17,163 and then deducting the 6,000 schemes lost, equates to just over 11,000 new schemes – far less impressive than more than 90,000.

At what cost?

Table 3 looks at the charges for each provider, detailing whether they levy a fee on an all-inclusive annual or per-transaction basis. Charges have been a key point in the industry of late, with many commentators saying that firms cannot survive on the current margins they are making on fees.

The entrance to the market of platform SIPPs and simple SIPPs means that many appeared cheaper than their rivals. The fact that these products had reduced investment options and less flexibility was often overlooked, with investors instead opting for the cheaper provider.

But the SIPP sector really is a market where price cannot be the determining issue, with value being far more important. If investors want a simple SIPP that can only invest in a handful of assets and is largely administered online, they should not pay a lot for it. However, those that want to buy property in their SIPPs and make more exotic investments and regular trades will be far better off paying more to be with providers that can facilitate these purchases easily and within HMRC and regulatory rules.

As Aviva says, “Whether it’s SIPPs, cars or mobile phones, there will always be customers who want a simple proposition that works well at a good price and there will always be customers who are willing to pay extra for more specialist requirements.”

Choices, choices

Table 4 looks at the investment options for each SIPP, and this clearly demonstrates what sector of the market each occupies. Some only permit investment in a single DFM or just cash, while others allow cash plus some funds, leading up to those that permit investment in all HMRC-permissible options.

In addition to asking about a wider range of investments, this time providers were asked how up-to-date their records of investments are. This taps into a larger debate over how much control SIPP providers should have over their book of business.

On the one hand some providers argue it is the adviser’s job to determine how appropriate an investment is and to control the purchase of it for the client, while others claim every provider should know the exact investments held within its book of business at any one time, so it can determine the risk of assets within it.

Robert Graves, head of pensions technical services at Rowanmoor, believes the responsibility lies between the adviser and client.

“The SIPP provider will make best endeavours to establish that any assets are bona fide investments, do not breach HMRC rules, do not create ownership issues for the trustees and do not create administrative issues. SIPP providers are not regulated to give investment advice.”

The vast majority of survey participants have a record of the investments held in their SIPPs, with just Axa saying it does not and Zurich and Avalon not disclosing whether they do or not. However, the frequency with which these providers update these details varies greatly.

Fourteen providers only collect the information annually, during which time the assets could change dramatically. What’s more, if they are not keeping an eye on the investments going into the SIPPs they will not be aware of large influxes of risky or potentially unsuitable investments.

That said, the majority of providers have the technology and systems in place to update this data either daily or on a continual basis. Whether they analyse it for investment trends or not is another question.

Clearly UCIS are a topical issue at the moment, with providers divided over whether they should offer them or not. Of the SIPP products listed, 51 of the 88 permit investments in UCIS, while the rest either do not or did not disclose their position.

UCIS have received bad press of late, with the FSA voicing concerns that they are being marketed and sold to the wrong people. The consensus is that advised-on sales are not as problematic, though that side of the market is by no means blemish free, but the non-advised space has led to mis-selling.

The FSA has now ruled that the products cannot be marketed to the average retail investor, instead being restricted to sophisticated and high-net-worth individuals.

SIPPs have been inextricably linked with UCIS, as a large number of the investments were put into pensions, meaning that SIPPs have suffered some reputational damage.

Differing investment options from each firm have become a point of debate, with some arguing that it would be better to have a list of allowable investments, rather than each provider determining its own stance.

Andy Zanelli, head of technical sales at Axa Wealth, says, “Since the removal of the permitted investment list for SIPPs there has been a degree of subjectivity from SIPP providers as to what is or is not acceptable. It would make the process easier if there was a new permitted investment list.”

Table 5 looks at the charges involved in buying commercial property. This is a growing area in SIPPs, with it driving more scheme set-ups in the higher end of the market, meaning the costs involved are a key focus.

The Table also looks at the number of properties held in the book of business and how this is broken down. As expected, it is predominantly UK properties, with a smattering of overseas holdings.

Land bank holdings have hit the headlines of late, with the regulator cracking down on a number of schemes. However, a few SIPPs still have significant quantities, namely Carey Pensions, which has 72 of its 612 properties in land banks, and Lifetime SIPP, which has roughly 10% in the holdings. While these may be legitimate, some see it as an area of concern if one provider has a large exposure.

Table 6 looks at the retirement options and associated costs for each scheme. Flexible drawdown is a key focus here, with it being a relatively new feature that some providers are either not ready to offer or have decided has too niche a market. In total eight do not offer it, predominantly the large providers, for whom it would not represent a large market.

To be eligible for flexible drawdown investors must have a minimum retirement income of £20,000 from approved sources, meaning the pool of people is rather low.

Once again, the prices involved in setting up drawdown, buying an annuity or taking an extra payment vary largely by provider, making it nigh-on impossible to compare. However, the Table gives a guide as to where providers sit in the market.

Tipping point

The market has reached a turning point, of this there is no doubt. With more attention from the regulator, more press attention and stuttering growth, the market is not ‘business as usual’.

With rulings on capital adequacy and the difficulty this will place some firms under, this period of change is not going to end soon.

However, this does not necessarily mean that change is bad. The industry has been calling for consolidation for a long time, with the market having become bulky and hard to manage. These changes should eventually lead to the buyouts that have been predicted for so many years.

But just how investors fare in these buyouts is up for question. If larger companies take over smaller entities that struggle with the new capital adequacy rules, it is likely there will be a change in ethos of both investment options and services, not to mention costs. Never has there been a more crucial time for advisers to look at the small print on SIPP contracts to see how quickly prices can be increased and to consider how rapidly investments can be outlawed.

If the industry manages this change in a neat and structured manner, it could only benefit investors. Whatever happens, it seems likely that this time next year the market will be an entirely different beast.