“Given the history of regulatory activity, consolidation of the Sipp market was inevitable”, says Martin Tilley, director of technical services for Dentons Pension Management.
“The regulator’s successive thematic reviews, which have made it clear providers operating in the Sipp market need to have robust asset acceptance, as well as the required increase in capital adequacy resources, has had a dual effect of squeezing many Sipp providers, who could not continue as a viable business.”
He comments that although consolidation recently may appear to be slow, the number of Sipp operators has reduced from its high approximately three years ago by about 50 per cent.
Indeed, “At least 10 firms have been acquired by other providers in the past 12 months”, comments Neil MacGillivray, head of technical support for James Hay. “There is little sign of this abating, with many firms admitting they are looking for further acquisition.”
One of these is Momentum Pensions, whose chief executive Stewart Davies says: “We expect consolidation to accelerate and, likewise, we intend to participate in this consolidation, which we regard as inevitable.”
This is backed up by the Financial Conduct Authority’s own figures, which show a gradual decline in the number of Sipp providers in the UK, since the sector's heyday after the 2006 pensions simplification regime came into force.
The following graph, compiled by the Rock Consultancy, shows the decline in the number of providers, based on FCA data, to 75 from 99 over the past few months.
Examples of recent purchases include London & Colonial’s acquisition by STM in September this year.
Chris Jones, founder of the Rock Consultancy, says: “It has been long predicted but activity has ramped up this year and will continue at a steady rate, I believe.
Yet he does not anticipate a tsunami of M&A activity: “I don’t see a huge wave, because these things take time.”
However, there are still many Sipp products available - the number of such products both on and off platform has burgeoned in recent years, data from the FCA/Rock Consultancy has shown.
This means there is still plenty of choice for clients and still plenty of providers, despite the predicted consolidation.
And, according to Greg Kingston, the rate of consolidation is “sensible”. He explains: “The pace of consolidation is limited by two factors: achievable capacity in the market and available quality in the market.
“There are only a few willing consolidators who can take on any type of size of acquisition but the biggest hindrance appears to be the lack of quality available.”
He says a number of Sipp businesses are rumoured to have been up for sale for months, if not years, but they’re unable to attract a buyer.
Mr Jones comments: “there are significant regulatory and legal hurdles, alongside commercial issues. Many firms looking to sell out are holding toxic investments or facing latent tax liabilities which turn potential suitors off.
“The toxic investment issue is a major stumbling block and what is needed is a bad bank solution to allow clients with commercially viable Sipps to be rescued from otherwise failing firms.”
“Advisers really need to ensure their due diligence is up to date for the existing clients”, Mr Kingston added.
Driver of consolidation
For Mike Morrison, pensions technical director for AJ Bell, the capital adequacy rules will be a primary driver of consolidation, not whether a provider is small or large.
He comments: “In many cases consolidation will be a direct result of firms being unable to comply with the new capital adequacy rules on their own.
“However, it will also be because for some firms, Sipps are not core to their business and they would rather leave the regulatory issues to a specialist rather than incur the costs themselves.”
Moreover, according to Elaine Turtle, director of DP Pensions: “We are starting to see a polarisation of the market with the platform-based Sipps on one side and the bespoke providers offering the full investment flexibilities on the other.
“It is fair to say most firms will have made the decision in the past 18 months to sell if they did not want to meet the new capital adequacy requirements. Those that have decided to stay will be meeting the new requirements with no issues.
“The remaining consolidation is likely to continue but it is unlikely to be a wave. It is more likely we will see the consolidation where the Sipp element of the business is not core and they don’t want to tie up so much capital.”
Although competition and choice could be seen as a positive thing for the end consumer, according to the regulator, having less proliferation within the market could be a good thing when it comes to Sipps.
Rachael Healy, senior associate at law firm RPC, says: “The then Financial Services Authority said at the time of the announcement that it expected 20 per cent of Sipp providers would be unable to meet the new requirements and the result has been a consolidation in the market.
"Some firms have already increased charges to cover the new capital adequacy requirements.”
Ms Turtle adds: “The FCA has indicated it would be happy if it shrank to a small number of super-Sipp providers and a small number of bespoke providers.
“The concern with this is that we may end up with little choice and competition in the market, which will be detrimental to advisers’ clients.”
