The principle behind the new regime is to ensure, should a Sipp operator have to be closed, sufficient capital is held by that firm to wind it down in an orderly fashion and help provide a good outcome for its clients.
The question arises as to whether the regime is necessarily delivering good outcomes for all clients of Sipp operators that are going concerns, and whether it is curtailing sound investment choices. To understand the issues we should first look at how the capital requirement is calculated.
The amount of capital that must be held is based on a two-part formula. The first part is calculated on the total value of assets held within the operator’s Sipps; known as the initial capital requirement. The second part is known as the capital surcharge, which is then applied to that initial capital requirement based on the proportion of the operator’s Sipps that hold an asset the FCA regards as being non-standard.
While two Sipp operators might have identical initial capital requirements due to the total asset value of their Sipps being the same, the capital surcharge for one would be much higher if a high proportion of its Sipps hold a pound’s worth of non-standard assets.
The impact of this is that some Sipp operators are seeking to avoid a high surcharge by moving away from allowing their plans to invest in non-standard assets. They will place restrictions on platforms, discretionary fund managers and investment managers preventing them from investing their Sipp funds in that way.
Investment problems
Some might say it is good that Sipp clients are being prevented from investing in non-standard assets. Unfortunately, defining investments as ‘non-standard’ has given rise to the notion that any assets falling into this FCA categorisation are tainted with labels such as ‘dodgy’ or ‘toxic’. In reality, a non-standard asset is any asset that is not listed as standard and cannot be readily realised within 30 days, or is not capable of being accurately and fairly valued on an ongoing basis.
There are assets, such as fixed-term cash deposit accounts, which would be classified as non-standard in the absence of a break clause.
For investors, a degree of illiquidity can be acceptable in the search for higher returns, particularly in long-term investment products such as pensions. Yet a Sipp investor could be denied access to such fixed-term accounts if their Sipp operator does not accept such mainstream, asset-backed non-standard assets due to capital adequacy requirements.
Sipp clients and their financial advisers subscribe to outsourcing investment decisions to a discretionary fund manager on the basis that they have the knowledge and experience to construct a specific and appropriate investment portfolio using a mix of assets. As a result of the capital adequacy requirements, some Sipp operators might be placing restrictions on fund managers from investing any part of the portfolio into non-standard assets, excluding specific assets that would ordinarily have been part of a well-constructed portfolio. This could include hedge funds that would be deemed to be non-standard from the outset, or Aim-listed shares that become non-standard if they are delisted.
Best possible outcomes
If investment professionals are prevented from using certain assets due to Sipp capital adequacy, best outcomes for clients might not be achieved. There is no expectation that the FCA will look to address this apparent unintended adverse consequence.
The crux of the matter is that for financial advisers and clients who wish their chosen investment professional to use their expertise to manage a portfolio unfettered by restrictions, selecting a Sipp provider that does not restrict investments to only assets defined as standard by the FCA becomes paramount.
Robert Graves is head of pensions technical services at Rowanmoor
