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Guide to Sipps
PensionsNov 10 2016

Changing Sipp propositions and rising costs

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Changing Sipp propositions and rising costs

According to Mike Morrison, head of platform technical for AJ Bell, “The rules have the aim of minimising poor outcomes, should a Sipp operator be unable to carry on trading.”

Under the rules the assets held by Sipp operators is divided into standard and non-standard assets, with the non-standard assets being those that cannot readily be realised within 30 days.

As Mr Morrison comments: “The higher the proportion of non-standard assets, the greater the capital that is required to be held.”

However, these rules on capital come with additional administrative costs, which have not gone down well with many Sipp providers.

An important aspect of transparency is for Sipp providers to fund the associated costs of meeting these regulations themselves. Stewart Davies

Greg Kingston, head of communications, product and insight for Suffolk Life, comments: “Regulation has steadily increased costs for Sipp operations over the past decade, making many providers unprofitable or simply unsustainable, and for those who have chosen not to sell, there has been little alternative other than to raise costs.”

But according to Rachael Healy, senior associate at law firm RPC: “The new formula was announced by the then Financial Services Authority (FSA) in November 2012.

“Therefore, Sipp providers have had time to make appropriate arrangements to ensure they have adequate capital in place.”

The FCA even wrote to all chief executives of Sipp providers in July 2014 to set out what was expected of them if they wanted to continue to operate in the self-invested market.

However, as a result of the stricter rules coming into force in September this year – as outlined in the FCA handbook – some operators have reported a rise in associated business costs and reporting requirements.

“Regulation undoubtedly adds to the cost base for providers”, says George Houston, senior technical and development manager for Mattioli Woods.

This has resulted in a few providers putting up the costs for some clients, while others have altered their propositions and restricted the type of non-standard asset.

Martin Tilley, director of technical services for Dentons Pension Management, comments: “Most of the Sipp proposition changes and cost increases have been led by a regulatory crackdown to ensure what should always have been best practice.”

This has also led to more adviser pressure on Sipp providers, says Stewart Davies, chief executive of Momentum Pensions. 

“Advisers are scrutinising Sipp providers more than ever before since the capital adequacy rules came in, and there is simply no room for anything other than complete openness and transparency.”

Fee hikes 

Elaine Turtle, director for DP pensions, comments: “The cost of compliance has continued to increase and eventually every business has to review its costs and see if fees have to increase. 

“Some Sipp providers have not increased fees for three to five years.”

On top of the normal fee increases, however, the cost of the new regulations has also risen – and some providers have had to pass these onto clients.

Ms Turtle explains: “Due to the FCA decision on standard and non-standard investments, and the cost this brings to capital adequacy, some providers have decided to add an additional fee for people holding non-standard assets.”

However, according to Rachael Healy, associate director for RPC, the additional charges for buying and selling non-standard assets should only end up being passed onto those clients actually wanting such assets.

She comments: “In the main, this fee should apply only to those clients, rather than everyone in the provider’s book of business.

“It would seem this is a fairer way to charge and, indeed, is the standard practice for a Sipp: pay for what you use.”

But the change has been implemented without great fanfare and, according to Mr Tilley, this is something of which IFAs need to be aware. 

He says: “Those providers holding previous or continuing to accept non-standard assets will have additional finance requirements, brought about by the necessary increased in the capital adequacy levels required to fund the provider’s business in the event of the need to wind up the firm.”

Mr Tilley is not disagreeing with the fundamental concept of having capital adequacy requirements. However he is concerned that the administrative complexity of calculating not just the value of all assets held by the Sipp but also the proportion of Sipps in the firm’s book which holds a non-standard asset means the costs of operating are rising significantly.

Failure to build a model which is economically viable will only lead to problems. George Houston

Moreover, according to Suffolk Life’s Mr Kingston, some providers have also introduced high exit charges, “making it increasingly difficult and expensive to transfer away should service be poor or flexibility decreased.”

Momentum’s Mr Davies does not approve of passing these costs onto consumers. He adds: “An important aspect of transparency is for Sipp providers to fund the associated costs of meeting these regulations themselves.”

Proposition changes

According to Mr Tilley, some Sipp providers just lacked the depth of knowledge, experience and skills to comply with the higher level requirements imposed on those accepting non-standard assets.

This has led to their withdrawal from the market or from some asset categories and, Mr Tilley says: “This can be embarrassing for intermediaries using a provider, who suddenly discover that assets previously accepted are  now being rejected.”

For Mattioli Wood’s Mr Houston, providers should have built a robust proposition to enable them to cope with regulatory pressure.

He comments: “Failure to build a model which is economically viable will only lead to problems and we have seen plenty of evidence in recent years of Sipp providers finding themselves in financial difficulty.

“Regulation is there to protect clients’ interests and providers have a responsibility to implement best practice in line with those regulations.”

Best of both worlds?

But Chris Jones, founder of the Rock Consultancy, does not see the market in a negative light. He says: “While some firms have cut their investment options and increased prices, other providers have actually extended their propositions to offer more flexibility at the same time as reducing plan fees. Every organisation is different.”

Other providers have developed hybrid operating models to create flexibility. Neil MacGillivray, head of technical support for James Hay, comments: “The market is extremely competitive and it is essential to ensure plan holders are only paying for the functionality they require. 

“This has led to the development of modular Sipps that allow the flexibility for the plan holder to move from between a basic Sipp to a full bespoke Sipp and back again, as and when required, without the need to transfer to a different provider, as would have been done in the past.”

Also, advisers could consider moving some clients onto a platform Sipp to reduce potential fees.

Mr MacGillivray explains that some individuals who may have a Sipp to hold commercial property but who now, in retirement, have a portfolio of collectives, could be paying fees “well in excess” of what they should be, because they have not considered moving to a platform Sipp.