It’s harder than it looks to gauge the mood music of the self-invested personal pension (Sipp) market at present. Another year of strong growth on the back of pension freedoms has been music to providers’ ears. But at the same time, there is an insistent, less positive undertone still to be played out.
While operators are enjoying the increased interest in Sipps that was sparked by the 2015 pension reforms, their greater prominence has brought further scrutiny from regulators. More important still is the sense that legacy investments may yet come back to haunt certain providers.
“Not all providers who have taken on non-standard investments will have issues, but this topic is still a bit of a cloud hanging over the bespoke part of the market,” says John Moret of consultancy MoretoSipps.
When it comes to sales, statistics provided by the FCA to Money Management following a freedom of information request show a mixed picture. As Chart 1 indicates, the number of advised Sipp sales reached new heights in 2017, rising to a peak of 59,786 in the third quarter.
But non-advised sales, having reached a peak of their own at the start of the year with a record 193,940 sales in the first quarter, fell away sharply in the final six months. The fourth quarter saw the figure drop to 160,989 – the lowest level for more than a year.
There are several possible reasons for this. It’s plausible that some of those who were previously execution-only customers have shifted to the advised market due to market pressures: wary of accepting transfers facilitated by introducer firms, several Sipp providers do not accept non-advised business. But operators’ policies on this front have typically been in place for some time, and the shift in sales patterns is clearly a more recent phenomenon.
More pertinent, perhaps, is the volume of defined benefit (DB) transfer money now ending up in Sipp structures. The requirement for transferees to take advice when moving their DB pension will probably have had an impact on the nature of the Sipp sector.
That will be a relief to those who insist that advised business is the only way forward for the market – though the British Steel Pension Scheme (BSPS) saga is a reminder that regulated advice itself is not free from unscrupulous activity.
Whatever the reason, Table 3 shows that business levels have continued to flourish for most providers.
This table, and others, displays one marked difference with those found in previous surveys. As Table 5 shows, we have split platform and ‘full’ Sipp providers for the first time, in the hope of better comparing like with like. There’s no doubt the market is continuing to split between those wrappers that – like other non-workplace pensions – typically invest in collective funds, and those that encompass property purchases and other assets. But a couple of the more flexible Sipps offered by platform providers have been kept in the main tables.
While platform providers have seen growth rates tick upwards slightly, the number of plans being opened at the likes of Barnett Waddingham, InvestAcc, DP Pensions and Organon are all up roughly 20 per cent on figures reported in our previous survey. That suggests a booming market, although a similar uptick in the number of plans being closed should not be overlooked.
An apparent drop in Suffolk Life growth rates, meanwhile, is only due to previous figures having included the acquisition of European Pensions Management.
Will the market remain in good health? The years of rapid expansion may look unsustainable, but absent a major correction in risk assets, it is difficult to envisage a scenario in which growth rates go into reverse.
The boost provided by the pension freedoms is a structural, rather than a short-term driver of growth. Despite this shift, Mr Moret estimates just one-third of all Sipps have started vesting. But he thinks providers have more work to do in terms of the services they provide to those taking income. Current vesting options are displayed in Table A.
Other complications are also starting to emerge, most notably in the shape of greater scrutiny of DB transfers. High-profile examples of questionable practices, in relation to BSPS and beyond, have meant the FCA is now subjecting transfers to closer examination.
As advisers await the regulator’s latest pronouncements in this area, some Sipp providers think an atmosphere of greater caution could act as a check on market growth.
“With the actuarial assumptions having turned slightly, the recent volatility in the stockmarkets and the FCA’s ongoing scrutiny of advisers and their transfer processes, I can see that we might have a reduction in transfer-derived new business during 2018,” says Dentons director of technical services Martin Tilley.
The vast majority of DB transfers will be destined for simple Sipps, rather than full-scale wrappers offering a variety of non-standard investments (NSIs). But it is not just transfers that are under scrutiny from the watchdog – non-standard assets, too, are in the spotlight. An autumn 2017 FCA request asking for details of operators’ NSIs has left Sipp providers pondering the regulator’s next move.
“It’s likely that the FCA’s work will revolve around following up their third thematic review in 2014, including the effectiveness of due diligence processes, and how well Sipp operators are following those processes,” says James Jones-Tinsley, technical specialist at Barnett Waddingham.
“Adherence to the capital adequacy regime, the categorisation of standard and non-standard assets, and what sources Sipp operators are getting their business from, are also likely to feature.”
More than adequate?
Further details of the FCA’s thinking may well be provided in its 2018-19 business plan, due to be published on 9 April. Our own assessment of providers’ capital adequacy and NSI policies can be found in Table 1 andTable 2. This year, the table has been combined with our assessment of non-permitted investments, which previously formed a separate part of the survey.
Alongside Table 1, the FCA’s response to Money Management’s freedom of information request provides updated statistics on providers’ capital adequacy status. As of 31 December 2017, 11 firms continue to use both Tier 1 and Tier 2 capital to meet requirements – the same number previously disclosed by the FCA in the middle of last year.
But the number using Tier 2 capital, such as loans to meet 25 per cent or more of this requirement, has dropped back to five, having risen from two in September 2016 to seven as of last summer. Table 1 indicates just four firms using Tier 2 capital, but there remain a handful of non-disclosures, as well as firms who declined to take part in the survey.
Broadly speaking, businesses’ capital adequacy data remains as it was in the October 2017 survey, but some have seen their cover fall back slightly. Liberty Sipp now covers 105 per cent of its requirement, down from 125 per cent, while DP Pensions’ has fallen from 172 to 130 per cent.
On the other hand, Talbot and Muir has now covered 117 per cent of its requirement, up from 100 per cent, and Barnett Waddingham’s cover has risen from 112 to 123 per cent.
On the NSI front, property (of all stripes) continues to be predominantly classified as a standard asset – unsurprisingly, given UK commercial property remains a standard asset under FCA rules. But most providers do have certain commercial properties that they classify as NSIs, probably because they are not deemed capable of being transferred within 30 days. Table 6 gives details of the type of commercial property held on providers’ books. Most notable here is the significant reduction at Hornbuckle: the 3,200 properties in our previous survey have fallen to 2,500 this time around.
Table B has more details on commercial property, while Table C details providers' cash account policies. A broader assessment of NSIs can be found in the fourth column of Table 1. These figures, which include the likes of fixed-term deposits as per FCA rules, state the percentage of a provider’s Sipps that have exposure to NSIs. Most providers have seen these rates fall by a couple of percentage points, most likely indicating a more cautious attitude to NSIs in general, but there are exceptions. Michael J Field, Walker Crips and Westerby’s figures, for example, have each crept up by a couple points.
The ‘vetting process for esoteric’ column, meanwhile, indicates most providers continue to accept NSIs. Similarly, there is a degree of unanimity among full Sipp providers as to what constitutes either a standard or non-standard asset. But some providers are concerned about the treatment of impaired assets. Graham Muir, director at Talbot and Muir, says: “The bigger issue centres on the inconsistency, between operators, in the valuation of ‘impaired’ NSIs. Anecdotally, we hear of some providers down-valuing such assets to £1, whereas others are maintaining valuations at book cost or at last reported valuation.”
Valuing low-quality assets at £1 or similar may enable providers to lower their capital adequacy costs. This, again, underlines the importance of advisers doing their due diligence, and is an area to which Money Management will return in more detail in future editions of the survey.
Impaired assets lurking on back books are central to many of the issues in the Sipp market at present. This may be one reason why industry consolidation did not emerge to the extent that many had expected in the run-up to the introduction of capital adequacy rules in September 2016.
“While it feels inevitable that [impaired] assets will drive some further consolidation, the reality is that many Sipp books are polluted by potentially toxic assets to varying degrees, and I suspect we’ll need to see a few legal cases settle before buyers will step in,” says Jeff Steedman, head of Sipp/Ssas business development at Xafinity.
“There are books out there we’ve looked at and said are too risky,” adds Paul Tarran, chief financial officer of Curtis Banks.
It is true that consolidation remains at relatively low levels, but one notable transaction has been announced since the last survey. Dentons announced in February that it had agreed to acquire Sippchoice for an undisclosed sum, in the biggest deal in the sector since Embark’s acquisition of Rowanmoor in mid-2016. Having boosted their asset bases, it is no surprise that both Embark and Dentons have said they are considering floating on the stock exchange.
But it is recent headlines relating to Sippchoice that are perhaps the most consequential for the sector as a whole.
A first-tier tribunal ruling at the start of March ruled in favour of the firm in its challenge to HMRC’s denial of tax relief on in-specie Sipp contributions. HMRC had also asked firms to pay back reliefs on in-specie contributions as far back as the 2012-13 tax year, which meant many were facing hefty bills: Mattioli Woods said in its 2017 financial results it had set aside a £900,000 provision relating to the issue.
The initial tribunal ruling will come as a relief to the industry, which, as Table 4 states, has ceased offering in-specie transfers since HMRC first made its intentions known in 2016. “The ruling puts HMRC on the back foot,” says Curtis Banks chief executive Rupert Curtis.
Other legal rulings may prove even more consequential for the sector. Berkeley Burke is being challenged in the courts by a group of investors over Sipp investments the claimants say were made by unauthorised introducers.
Carey Pensions, meanwhile, is facing a number of Financial Ombudsman Service (Fos) claims, according to a BBC investigation. The firm has already announced it is to split its “distressed” assets into a separate book of Sipp business, in what it described as an “efficiency decision”.
Both firms declined to fill in this year’s Sipp survey. The Berkeley Burke case, in particular, is tipped to be a barometer for the likelihood of further action against providers.
Richard Prior, head of self-invested pensions at JLT Premier Pensions, says: “Sipp providers with high numbers of failed, non-standard investments are now anxiously awaiting the outcome of the Berkeley Burke judicial review case and a separate case against Carey Pensions. If the decisions go against these providers, there is a suggestion there could be as many as 6,000 cases waiting in the wings, with potential compensation likely to total tens of millions, and numbers likely to increase significantly.
“The feedback we have received from advisers is that they are increasingly concerned about the level of exposure Sipp providers may have to failed non-standard investments, and whether they are financially strong enough to cope with a potential spike in compensation claims. There are also question marks about whether providers will have the support of their PI insurers if they are hit with significant compensation claims.”
This is just one piece of evidence that the regulatory backdrop may be about to become tougher for Sipp operators. Earlier this year the Financial Services Compensation Scheme (FSCS), declaring Brooklands Trustees, Stadia Trustees and Montpellier Pensions Administration Services to be in default, said it would start accepting claims against Sipp providers in relation to due diligence practices.
“The recent FSCS decision, coupled with similar claims being put before the court, suggests the Sipp industry appears to be reaching a watershed moment,” says Lee Halpin of @Sipp.
At the heart of the issue is the age-old debate about whether an adviser or a Sipp operator is liable in the event that investments go awry. Fos claims against Sipp providers have been put on hold for several years, pending clarity over a Berkeley Burke challenge to a 2014 ruling against it. But rulings against providers in the legal cases mentioned above could oblige the Fos to fall in line. If that is the case, advisers should not breathe a sigh of relief. Rather they should redouble their own due diligence practices, and the questions they ask of operators, to avoid being caught out down the line.
A robust assessment of risk – relating to both current and legacy investments – will be crucial to ensuring the Sipp success story can continue.