Sipp providers to struggle with default pathways

Sipp providers to struggle with default pathways

Life is set to become more difficult for Sipp providers because of recommendations made by the Financial Conduct Authority (FCA).

Back in June the FCA's 78-page Retirement Outcomes Review report recommended Sipp providers offer un-advised customers different default investment pathways.

The FCA has called for providers to offer ready-made drawdown investment solutions within a simple choice structure to help consumers make investment decisions.

Article continues after advert

The investment pathways should enable consumers to make one choice to suit their preferred outcome, the watchdog has said.

The report specified that default pathways should include options for: allowing savings to provide and income in retirement; taking all savings over a short period of time or keep savings invested for a long period of time with the possibility of dipping in occasionally.

However pensions experts have warned the pathways, due to be implemented in 2019, don't take into account the risk profile of the customer and could lead to poor outcomes for investors.

Jess List, pension technical manager of Curtis Banks, said: "The difficulty is that Sipps don't typically offer set investment solutions, so the idea of offering investment pathways is not necessarily compatible with how they work.

"The retirement outcomes review acknowledged this; it was welcome news for providers that the FCA had recognised that the investment pathways idea would not be easy for Sipp providers to implement and that it is exploring possible solutions."

Smaller Sipp providers in particular may struggle with providing default investments, which may in turn drive consolidation on the market of bigger providers taking over smaller ones, according to Mark Smith, chief operating officer at Mattioli Woods.

Not only this, but the costs of providing the investment pathways may outweigh the revenue made from them due to a predicted low uptake, warned Mr Smith.

Mr Smith said: "This will require a whole new structure and pure Sipp providers don’t have investment options in that way. 

"Providers may need to find someone to partner with, for example investment management firms who will manage default funds of all clients.

"I can't see how smaller operators will be able to build the infrastructure as it will be expensive to do so from scratch and they won’t make a profit.  

"Advised clients, won’t go into default options and only a small proportion will be unadvised and this proportion will be split across three different default options.

"Financially it is unlikely to get off the ground but it will cost firms a lot of money to do.

"The default investment pathways is inevitably going to drive consolidation in the market.

"The only way smaller providers would be able to get around advised clients is by only accepting the business of advised clients."

Curtis Banks' Ms List also said that the default pathways might throw up the risk of lower customer engagement and lead to consumers thinking they do not need to engage with their investment.