The speed of change in the self-invested personal pension (Sipp) market means its status as the sole recipient of two Money Management surveys a year has rarely been called into question. But in one particular area, the sector has slipped into an unexpected stasis.
The growth of the Sipp market has been frantic, particularly in the aftermath of the RDR and the 2015 pension reforms. But their growing popularity with consumers has not been without problems.
Sipps’ status as the go-to retirement vehicle has also attracted scammers, who have exploited the products’ sometimes dangerous combination of flexibility and complexity to hoodwink savers into investing in unregulated and unscrupulous schemes.
Clamping down
The FCA has reiterated its tough stance on such practices, but the short-term shape of the Sipp market may hinge on civil court outcomes, rather than regulatory intervention. Our previous survey, in April, stated as much, and there has been a surprising lack of movement since then.
Two providers – Carey and Berkeley Burke – are locked in legal disputes, with the roles of unregulated introducers and high-risk assets at the heart of both proceedings. The former case involves one complainant, Russell Adams, whereas 77 people have raised a group mis-selling claim against Berkeley Burke.
Meanwhile, a judicial hearing into whether the Financial Ombudsman Service (Fos) was right to rule against Berkeley Burke in 2014 for failing to carry out adequate due diligence on unregulated investments is due to take place on 10 October. This case will also have significance for the market, given the Fos has appeared reticent to take a firm stance on Sipps prior to the hearing. But commentators say delays to the civil cases are also emphasising how tricky such decisions may prove.
Martin Tilley, director of technical services at Dentons, says a delay in announcing the Carey judgment poses a problem for the whole industry. “The fact that judgment is outstanding over five months after the case closed would indicate the issues at hand are multiple and complex. It would appear to be far from the ‘cut and dry’ scenarios some commentators have stated.
“There are also separate issues to consider: the acceptance and need for due diligence on assets of Sipp providers introduced from financial advisers, and the acceptance, or otherwise, of assets from unregulated introducers who may have had an interest in that investment.”
For Carey, it appears even a favourable outcome would not be enough to save it. In May, the Sipp administrator put itself up for sale after reporting losses of £153,784 and £215,226 in 2016 and 2017, respectively.
Nigel Bennett, sales and marketing director at InvestAcc, says: “We hope that once these cases have been concluded we will have more clarity over who is responsible when investments go wrong, although realistically this may only provide part of the picture as the facts of the cases and the judgments made are unlikely to fit every scenario.”
No introductions needed
The role of unregulated introducers has cast a cloud over the Sipp industry since the introduction of pension freedoms. While many scammers have sought to use small self-administered schemes to entrap victims, Sipps have also played a part. Recent data shows the number of complaints about Sipps has almost doubled, and the proportion of these complaints upheld is higher than for any other product.
Statistics from the Fos, published in August, show the number of new cases rose to 922 between April and June this year, up from 521 over the same period in 2017. More than a third (35 per cent) of the decisions went in favour of the consumer, placing further scrutiny on whether Sipps are being sold and administered appropriately.
Some may argue that a hike in the number of complaints is part and parcel of a booming market. But whatever the outcome of the pending court cases, some in the market believe providers must take it upon themselves to strengthen processes.
Morgan Lloyd technical director John Dowding says: “Unless there is some intervention from the authorities, be that the FCA or HMRC, then [unregulated] investment opportunities will continue to be promoted.
“It is therefore increasingly important that Sipp providers significantly enhance their due diligence requirements to ensure that spurious and unsuitable investments are rejected at the earliest opportunity.”
The Fos, however, has faced scrutiny of its own. An expose by Channel 4’s Dispatches programme has led to the organisation planning to overhaul a number of its current practices. Greg Kingston, group communications director at Curtis Banks, suggests this is something that will benefit providers.
“The Sipp brand will continue to be tarnished by what are, in reality, investment claims. From a provider perspective, it would be encouraging to see the consistency and quality of decision making at the Fos improve. It is important for everyone – providers, advisers and consumers – to have confidence in the ombudsman’s services.”
Latest statistics
Our survey indicates that business remains relatively buoyant in the face of these challenges, though growth rates have now slowed slightly.
Table 3 highlights firms’ business levels over the past 12 months. Given that only a minority of individuals set up a Sipp with new money, the bulk of business comes from transfers, with London & Colonial and Morgan Lloyd witnessing 100 per cent of new money arriving on this basis.
The surge in volumes from defined benefit (DB) schemes also continues to play its part, despite Money Management reporting earlier this year that the upward trajectory of transfer volumes has begun to reverse.
Mr Kingston explains: “Sipps continue to be the main beneficiary of pension transfers, keeping pensions invested for longer. That transfer business has slowed as the heat has gone out of DB transfer volumes. I think there must be some future concerns around providers who accepted DB transfers without advice.”
On an individual level, some providers have seen sizeable upticks on new plan sales over the past year to 30 June. Barnett Waddingham’s figures are perhaps the most eye-catching: in April, the provider recorded 1,034 new plans, but this has more than tripled to 3,119 this time around.
Others have seen the opposite occur. The number of plans set up through MC Trustees has almost halved from 56 to 29.
Our latest survey also includes year-on-year percentage changes to business levels for the first time. While this is an inexact metric – some providers’ figures may be distorted by acquisitions, for example – the figures show the typical firm is still showing very strong growth. By the same token, the growth in plan closures, while at a lower overall level, is also on the up.
Another aspect showing a decline is the average Sipp value, which has fallen £20,000 to £307,000 over the past six months – struggling global stockmarkets being the likely culprit.
Capital adequacy
The FCA’s capital adequacy rules, which came into force two years ago, increased the demands on providers. Introduced to remedy concerns about the types of assets firms were holding, the rules have posed numerous challenges, particularly for smaller firms.
A number of minimum benchmarks were set, with a particular focus on a company’s financial strength based on its assets (capital adequacy ratio), and the proportions of this held in either cash and reserves (Tier 1) or preference shares and debt (Tier 2).
Previously, a number of firms were forced to consolidate after struggling to meet the requirements, but Mr Tilley feels this is unlikely to be a driver for future acquisitions.
“Those companies that were struggling, or would be struggling, have perhaps already ‘come to market’, so I’d be surprised if capital adequacy was a sole driver for consolidation going forward.
“Sipp providers are required to monitor and report their capital adequacy to the regulator quarterly, so it should be a matter that is constantly under review.”
According to Mr Dowding, the rules fly in the face of a Sipp’s purpose. He says: “The capital adequacy requirements have clearly seen a greater number of providers moderate the availability of non-standard investments in an effort to contain future capital requirements. What this has done is diminish one of the Sipp’s principal benefits, and to many the fundamental point of a Sipp – the flexibility of investment.”
Table 1 details the latest state of play on the capital adequacy front, and shows most firms continue to favour meeting requirements via Tier 1 capital. Michael J Field takes a contrasting approach, holding three quarters of its requirement in Tier 2. Nonetheless, there has been no change by the firm on this front since the previous survey.
With regards to the standard assets that firms choose to omit, only physical gold and UK commercial property feature. Table 2 shows which assets Sipps allow on an individual basis. In addition, details of which firms hold commercial property, plus the types of property they hold, can be found in Table 6.
There remain differing opinions on whether or not to classify certain assets, such as commercial property, as non-standard. James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham, explains that where this occurs, it is arguably due to the absence of a standardised definition list from the regulator. He says the quality of the business undertaken is of greater importance than black and white definitions, but suggests this is only true up to a point.
Mr Jones-Tinsley adds: “However, where that difference is magnified, whether by coincidence or to gain a cynical competitive advantage, that is quite another matter. Again, the FCA needs to monitor this, and may have to be more prescriptive in order to maintain a level playing field. Ultimately, a more definitive approach could be helpful for everyone.”
FCA guidance
Robert Graves, head of pensions technical services at Embark, says further action from the FCA may be on the way. “The criteria of having to be readily realisable within 30 days is a case in point, particularly with regard to commercial property,” he says.
“It can be anticipated that the FCA will carry out a thematic review of how Sipp operators are adhering to the requirements, and through that mechanism further guidance may be forthcoming that will help uniformity in classification.”
The classification of Sipps themselves is split into three categories: independent open architecture, platform-only and DFM-only. Details can be found in Table 5.
As with our previous survey, we have again grouped Sipps into two categories: simpler platform Sipps, and those that offer a full range of services and investments.
Greater access to full-service Sipps on platforms is something advisers are clamouring for, according to recent research. A survey by Coredata Research, encompassing more than 1,000 advisers, found that a quarter would like to see Sipps and other complex pension arrangements on platforms, higher than any other product.
Tax travails
The RDR managed to deliver greater consistency to how advisers charge consumers, but Sipp product charges remain disparate. Table 4 lists the various fees for each provider, and overall these have largely remained static since April this year.
But the stark differences as to how firms charge for setting up and administering a Sipp only serve to highlight the challenges for consumers choosing to purchase such plans without taking advice. This is particularly true for annual fees, where some opt for fixed costs and others charge percentage fees.
Table 4 also indicates a further form of stasis that persists in the Sipp market. Another legal dispute means that all non-platform providers continue to feel unable to accept any form of in-specie contribution.
A tribunal hearing in March between Sippchoice (which has since been acquired by Dentons) and HMRC delivered a favourable outcome to the provider on the subject of allowable in-specie contributions, which were suddenly called into question by the department in 2015. The decision, however, is being appealed, causing further unrest in the industry.
Shrinking market
The ongoing legal battles aside, discussion once again turns to consolidation. Some commentators feel the decisions for both Carey and Berkeley could drive further acquisitions. But others are not so sure. Mr Tilley believes the catalysts that prompted previous sales may no longer apply, despite his own firm being the most recent high-profile acquirer in the sector.
“The need to reach and maintain capital adequacy benchmarks, for example, has been in operation for two years so should have settled down now. We would suggest, in fact, there are barriers to consolidation,” he says.
“While the industry is uncertain of the outcome of legal and ombudsman cases, it is difficult to value a business with confidence if it is holding any significant level of non-standard assets that might be considered as toxic, or if it has a large book of investment-led, non-regulated introduced Sipps.”
Others, such as Barnett Waddingham, do predict a further decline in the number of providers, but believe this will be due to companies going bust rather than being acquired.
Meanwhile, these scenarios are making it ever harder for advisers to select the right Sipp provider, according to Mr Bennett, who adds that the market’s reputation hangs in the balance if the Carey ruling is unfavourable.
He says: “Due diligence questions are evolving as advisers need to gain a thorough understanding of the types and sources of business accepted by the firm, as well as the amount and nature of exposure to non-standard investments.
“Depending on the outcome [of the Carey case] there is a real risk this could put some firms out of business, and it is likely all firms will suffer to some extent due to the way the Sipp brand has been tarnished once again [as a result of] the practices of a few.”
