SIPPAug 3 2020

Sipps face cap ad hike in property fund reform

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Sipps face cap ad hike in property fund reform

Self-invested personal pension (Sipp) providers are facing higher capital adequacy requirements if they hold property funds, under plans outlined by the regulator today.

In a consultation paper published this morning (August 3), the Financial Conduct Authority (FCA) proposed rules which would require investors to give notice — potentially of up to 180 days — before their investment in open-ended property funds can be redeemed.

This would mean property funds that are no longer able to be withdrawn within 30 days, would now need to be classed as non-standard assets, in turn affecting the capital buffer providers are expected to hold.

Under capital adequacy rules, introduced in September 2016, providers must categorise all asset types as standard or non-standard.

The rules require firms, depending on their assets under administration to hold either 10, 15 or 25 times the square root of the value of their assets as a cash buffer.

But they must also hold a “capital surcharge” based on their non-standard assets.

The FCA stated: “Existing client property fund assets within a Sipp plan could move from being a standard asset to a non-standard asset. 

“Where relevant client plans do not already contain non-standard assets this may lead to a step increase in capital requirements as the capital surcharge would apply.”

In order to give Sipp providers time to ensure they have the required capital adequacy in place, the regulator has proposed a transitional rule which means only new units in property funds, which are bought after any rules come into force, will be counted as non-standard assets.

Provider view

Some have warned such a rule change could see providers stop accepting property funds and it could also cause managed portfolios to no longer include property as an asset type.

But James Hay said if the rules are confirmed it might change its investment policy of not accepting non-standard assets.

A spokesperson said: “We can understand what the FCA is trying to achieve, but if this consultation leads to a situation where new investments in property funds means they automatically become non-standard investments (NSIs) as they’re unable to be redeemed within 30 days, then we’d have to review our current policy of not accepting any new NSIs.

“Having such illiquid funds available on the platform could create some operational challenges, as generally speaking all of the funds we offer on our investment centre are daily (maximum weekly) trading. These funds would not allow that.”

Meanwhile, Tom Selby, senior analyst at AJ Bell, welcomed the move and said the regulator was right to take “a pragmatic approach” to Sipp capital adequacy.

Mr Selby said: “Creating a transitional regime so, for capital purposes, only new units in property funds purchased after any reforms are introduced are counted as ‘non-standard’ should give firms sufficient leeway to plan around the reforms.

“AJ Bell already holds capital well in excess of regulatory capital requirements and so the changes will not materially impact our capital position, should then come into effect.”

Fund suspensions

Today’s proposals come after many property funds have been suspended in the past months.

Just as the country was preparing to enter lockdown in the third week of March, it was decided that all UK property funds available to retail investors would be suspended, with £12.8bn of assets between them.

The portfolios were gated because the coronavirus crisis had caused “material uncertainty” in the UK property market, meaning valuers were unable to value the assets within the funds with the same degree of certainty as would otherwise be the case.

The illiquid nature of property meant a reliable price was not always readily available.

High levels of redemptions can also cause a fund's suspension, such as when M&G suspended its £2.5bn property portfolio fund in December.

This also sparked a number of funds to gate in the wake of the EU Referendum.

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