It’s often been said that the self-invested personal pension (Sipp) market operates on two tiers, but there is increasing evidence that these tiers have become somewhat blurred and in reality there are already more than you would imagine.
If we cast our minds back to 1991 and the release of the first Sipp products, they were intended for, and originally created for use by, entrepreneurial individuals who had the expertise and wanted to control their pension assets.
Early Sipps were for high net-worth individuals – often investment professionals, business owners and the like – but what did self-invested actually mean? A member could request a switch from one fund to another in almost any personal pension plan so it was taking the loosest definition, any pension that could be capable of self investment. Sipps were the new and sexy vehicle to hold in your financial portfolio, and it wasn’t long before the marketing departments of most pension firms were touting their products as a Sipp.
When the FSA first fully took the reins of Sipp regulation, it received 135 applications and, at its peak, their figures suggest that more than 175 Sipp operators were receiving business. These operators, many of which were new to the market, fought for market share in any way they could.
There were two main arenas in which they could compete. The first was the level of fees, so a fee war ensued as a result. The second was on asset acceptance, where the flexibility to accept more esoteric assets made them available to a wider investor and investment promoter base.
Although the number of Sipp operators has now dropped back by around 100, which is largely due to the recent effects of the FCA’s third thematic review and capital adequacy requirement, there is still a varied and diverse market. Historically, this has led to some issues. Surveys of the market became confused and the comparison between operators became difficult, causing confusion when clients (and, to some extent, IFAs), thought that some Sipps could do things that they couldn’t. Very clearly, all Sipps were not the same.
Therefore there were frequent calls for a split or redesignation to solve the issue, but this was never going to be easy from a legal definition perspective. Another problem was there were many hybrids or Sipps that could be upgraded from platform-based versions to the full Monty. We always had those that could and those that couldn’t. The best the market could do was to try and define products as platform and full Sipps or, in the more recent past, as those that hold only standard assets and those that can accommodate non standard assets.
Thematic review
Enter the FCA’s thematic review of 2012, which was at least in part, if not in its entirety, aimed at curbing the enthusiasm of some providers whose asset acceptance processes had fallen below acceptable standards.
The outcome of that review, which was summarised in the FCA’s letters to CEOs written in July 2014 (the title of which included the words action required) was the key catalyst for what was at first deemed to be polarisation of the Sipp market, but which has subsequently evolved into a more diversified set.
That letter made it clear that the responsibility for treating customers fairly lay firmly with the Sipp operator (although this was a reinforcement of earlier directives) and this should include a robust process determining the quality of assets that a Sipp operator would hold in its book. If you were going to accept assets of an esoteric nature, you had to be able to understand them fully, weed out the chaff and ensure the accepted assets were fit for purpose and could be acquired, held, valued and disposed of in an appropriate manner.
Meeting regular demand
Operators looking to continue in this market, and include acceptance of unquoted equity, unregulated collectives, third party loans and intellectual property, to name but a few, had to have the necessary experience, expertise and knowledge to review these investments in order to meet the regulator’s demand.
To continue in this market would obviously have cost implications. Employees who are capable of in-depth asset analysis do not come cheap, and this strategy can only operate where there is sufficient volume and so enough income to warrant the expense. For several Sipp operators, the costs to continue would not have been economic and this triggered not only a change of proposition, but for some an exit from the market.
Others took the route of increasing fees to accommodate the continuing wider investment acceptance strategy, effectively reversing the fee war that had existed for a proposition that would enable their continued existence.
The impact of cap-ad rules
The FCA’s capital adequacy hikes have also been a significant contributory factor. From September 2016, the regulator has required Sipp operators to hold readily available assets to cover the costs of an orderly wind up of the business. This capital requirement is split into an initial capital requirement (ICR) and a capital surcharge (CS), the latter of which increases in line with the proportion of the operators that hold non standard assets.
Therefore continuing in a market where non-standard assets are accepted became a balancing act of accepting sufficient cases that made the continuation to accept worthwhile, while not taking on so many that capital adequacy requirements became onerous.
The holding of capital, while a necessity in itself, means setting aside capital that cannot be put to better use within the business.
Some operators took action more immediately than others, but the consequences are still emerging. One reasonably major player announced early this year that they would exit the non-standard market entirely.
This has been done so that focus can continue on its platform sales. This is a clear move from one tier to another, although the distinction is not always that obvious.
Where is the line?
The designation of platform-only Sipps should not be a difficult process, and this tier should be easy to understand. A number of platform-only Sipps do exist.
There are also those that can also offer access to discretionary fund managers. There are others that can allow commercial property purchases in addition to this, but many of these limit their property proposition by not accepting joint purchases, property syndicates or property mortgages.
Others will limit property exposure to the UK or UK-based legal systems to ensure understanding of key title concerns, taxation issues and to keep the asset within the FCA’s definition of a standard asset.
At the other end of the scale, factor in those operators who may allow unregulated collective investment schemes, unconnected third party loans and unquoted equity in addition to standard assets, but limit these by investment party domicile or a fixed proportion of the Sipp assets, and you have a multi-tier market where the number of levels seems endless.
However, at the top end of the scale, I’d suggest there are no longer any true full Sipp operators. To allow unlimited asset acceptance would require a knowledge base and expertise in all asset classes, which must be near impossible.
So how many tiers are there in the Sipp market?
I would suggest almost as many as there are remaining providers.
The challenge for the intermediary is making sure they are aware of exactly what the Sipp operator’s proposition is, what their future proposition will be, and that it will always meet their clients’ requirements.
Martin Tilley is director of technical services at Dentons
