The FSA’s crackdown on SIPPs is justified, the industry believes. But its ideas about risk and asset valuation are still flawed. Kam Patel reports.
This article was first published in March 2013. Some of the observations about annuities will now be seen in a different light, but the salient points remain valid.
No-one is doubting that the SIPP sector has had a decidedly tough time of late – what with unrelenting bad press and a regulatory watchdog snapping at its heels, following revelations of dodgy schemes and of clients being kept in the dark about the true risks associated with investments. Yet our researches confirm that the outlook for SIPPs as a whole remains strong.
New data from MoretoSIPPS, a specialist consultant and advisory service, reveals that the UK market now boasts just over a million SIPP plans worth £122 billion – and that it has grown by a hefty 35% per annum since pension A-day in 2006. The 10 largest providers now account for almost 80% of SIPPs and 66% of assets, according to MoretoSIPPs’s founder John Moret. But it’s the smaller operators who are under pressure.
A Promising Future
Moret’s SIPPs’s research is drawn from a survey of over 90 SIPP operators, including all the major players. To which we should add that there are at least another 80 organisations approved by the FSA as operators, most of them are very small.
Moret says that while it’s unrealistic to expect the heady growth rates seen in the past will continue, there is more growth to come. Key driving factors, he says, include the role of platforms, which are focusing more and more on acquiring and retaining pension assets into retirement. But, with interest/gilt rates looking set to remain at historically low levels for some time yet, Moret says he also expects that increasing numbers of wealthier investors will put off buying an annuity and use SIPPs instead as the drawdown vehicle.
Moret also expects that auto enrolment will have a positive impact, because it will lead to growth in DC pension pots which may well move into SIPPs as employees change jobs. Moret points out that there is still a lot of money – around £250 billion – left in legacy individual pensions, much of it underperforming and therefore suitable for transfer.
“I think it’s reasonable to project another 500,000 SIPPs by 2020,” he says. “The only caveat is the potential damage to the SIPP brand that’s been caused by the fallout from certain dubious investments which have received considerable adverse publicity in recent weeks.”
Lumbering Regulatory Response
Hallelujah to that last bit. But of course, concerns over the SIPP sector and its messy, uncontrolled growth have actually been doing the rounds for many years. It was two years ago that the chickens properly started coming home to roost, with the Serious Fraud Office warning in July 2012 of fraudulent abuse, after uncovering cases of SIPP investors who were being encouraged to disinvest their pensions and put them into highly speculative schemes with little or no chance of payback.
Sure enough, the FSA lumbered onto the scene last November with new rules requiring SIPP operators to provide key features illustrations to consumers, and to show how charges would impact on their investment returns. In addition to the rules, which come into force in April 2013, the FSA lowered the pension projection rates that give retirement savers some idea of the return on their investment. And for good measure it also ordered providers to quote appropriate rates of return, subject to the regulator’s maximum projection rates.
Then came a challenging consultation paper in which the regulator proposed raising the minimum amount of capital required to held by SIPP operators from £5,000 to £20,000 – the minimum the FSA says it usually costs to wind down a SIPP operator. The exact amount of capital required, however, will depend on volume of assets under administration. Generally speaking, the more assets an operator holds, the more capital it will need.
The watchdog also proposes an additional capital surcharge for operators who hold non-standard asset types such as Unregulated Collective Investment Schemes, because they take longer to transfer in a wind-down situation. For ‘non-standard’, read any asset not appearing on the FSA’s defined list of standard assets such as cash, real estate investment trusts, corporate bonds, exchange traded commodities and unit trusts.
Watch Those Assets
Andy Bowsher, director of self invested pensions at provider Xafinity, is clear about the merits of the FSA’s stance on key features: “Transparency is vital to the health of this industry,” he says, “and this measure should result in providers with customer driven businesses ultimately thriving. So we absolutely support clear information to clients at outset.”
But Xafinity is “very concerned” at the prospect of SIPP providers having to project underlying assets – including the charges of those underlying assets – because of the margin for error that’s involved. “Can you imagine trying to project for a DFM account or a structured product?” he asks. “The FSA’s rules suggest that providers can use ‘reasonable assumptions’, but the scope for divergence is really quite obvious.”
Bowsher fears there is a very real danger that comparative illustrations will favour those who take, for instance, the most cost effective route in order to reach the most favourable answer. Xafinity’s preferred solution is to base all projections on just the SIPP provider’s charges to allow for proper comparison. “Unfortunately, the FSA chose not to take note of the concerns that we and others raised on this point, and I fear we’ll end up with projections that are at best no good for comparison, and at worst deliberately misleading.”
As for the capital adequacy proposals, Bowsher acknowledges that there is a need for a better approach on this front. “There are SIPP providers who apparently haven’t carried out appropriate due diligence on certain assets – and subsequently those assets have failed, lost money, been fraudulent and so on. And it’s no good for the reputation of the SIPP industry. If there are SIPP providers holding these sorts of investments, it is right that they should be reserving some form of risk-based capital. We think the minimum capital requirement is a good idea.”
Still, like many in the industry, he is “highly concerned” that capital requirement will be based on asset values, some of which cannot be valued. He also points out that asset valuations within a SIPP don’t happen very often for some types of assets, especially for commercial property.
Paint By Numbers
Then there’s the rather perverse result that a firm with lots of small SIPPs with non-standard assets will be required to hold much less capital than firms which hold small numbers of large value non-standard asset SIPPs. “Ultimately, the time taken to wind down a business depends on the volume and nature of the investments, not their value. Xafinity has proposed that capital should be based on numbers of SIPPs. We’ve also disagreed with the inclusion of property as a ‘non-standard asset’ – it’s a well understood asset that doesn’t have to be sold upon wind-down. “
Indeed, he says, no assets actually need to be sold on wind-down if there’s a separate bare trustee. On wind-down the bare trustee can be disposed of by sale (always assuming that there’s a buyer) with a simple change of trustee name. “There is no recognition within the proposals that some companies have set up their businesses so as to ring-fence trustee ownership – thereby almost fully removing the wind-down risk, apart from, perhaps, providers who have allowed any really dangerous investments – but there are other ways to tackle this.”
Bowsher is unconcerned, on the whole, by the enhanced level of regulatory scrutiny; indeed, he regards even the new capital adequacy proposals as drivers of competitive advantage for the business. “For example, we remain very much in the commercial property space, when others will have to consider long and hard as to whether they can remain there. Indeed commercial property and land investment remain a core driver of ‘true SIPP’ growth, and as one of our key specialisms, helped drive Xafinity sales growth last year.
Over at Suffolk Life, there was also a mixed response to the FSA’s crackdown. On the key illustrations requirement, and the impact of charges on returns, Suffolk’s head of marketing Greg Kingston points out that SIPPs, covering as they do a diverse array of investments, are being unceremoniously squashed into the rules intended for normal personal pensions. Because the FSA has deemed that they should be treated the same, this means to Kingston that a number of inconsistencies immediately arise.
“What is relevant for comparing costs of similar investments in stakeholder pensions, for example, soon becomes largely irrelevant for a large number of SIPP investors,” Kingston says. And another thing, while we’re at it.
“Often the cost of the actual SIPP wrapper is totally dwarfed by the costs of investment – yet the provider is still obliged to show all relevant costs – and that includes the cost of advice too. There is no doubt that some SIPP providers find this frustrating, especially for certain investments – such as commercial property – where illustrations do not appear to add any value and may in fact add confusion.”
An Essential Shake-Out
Suffolk Life says it experienced its strongest year of growth during 2012, thanks in part to a much greater focus on integrating with platforms and investment providers. Over the past couple of years the company has built integrations with over 20 new different platforms and investment firms. “If, for example, an IFA uses a DFM such as Cheviot, we want them to be able to run that in a Suffolk Life SIPP – SimSIPP, in this case. But then, if that same adviser has a client that requires a model portfolio run on a platform, we can offer a Suffolk Life SIPP to support that too.”
Despite the gloom created by the pace and severity of regulatory change, Kingston is convinced that the SIPP market has a bright future: “That future will likely see fewer SIPP providers, but they’ll be stronger and safer, and the consumers will still have the same range of choices, access to investments and flexibility that they have today.”
But smaller providers are likely to become scarce, he thinks, unless they have a niche unique selling point or else the financial means to invest a significant amount into their businesses.
“We’ve already heard from a number who clearly have decided that they do not want to continue operating. I made the prediction that, if the FSA’s proposals in CP12/33 [“A New Capital Regime for SIPP Operators”] were to be implemented as written, then we would see fewer than 40 SIPP providers remaining by 2015. The market needs that kind of consolidation to move forward.”
Commenting more broadly on the sector’s current woes, Kingston is clear that the (until very recently) light touch regulatory oversight of the industry and negligible set-up costs have much to answer for. “It meant that there’s been no barrier to virtually anyone entering the SIPP market. Poor quality providers have emerged as a result, some of which appear to have been set up for no reason other than to channel money into highly questionable, often high commission, investments.”
Due diligence is the order of the day, he says. “Established names and reputation are no longer sufficient guarantees of security – advisers need evidenced facts. Any sign that a provider is not willing or able to entertain such scrutiny is likely to immediately demonstrate that it is time to look at a different SIPP provider.”
Due Diligence Is Vital
Martin Tilley, director of technical services at SIPP and SSAS specialist Dentons, agrees on the critical importance to IFAs and clients of fully researching potential SIPP providers and their due diligence procedures. He advises them to look for a track record that goes well before the FSA opened the doors to SIPP Provider status in 2007. And he says the expertise of staff, the continuity of key personnel, the financial stability and – crucially – the due diligence process should all be examined carefully.
Tilley says it is unfortunate that the FSA has had to ‘go public’ with its criticisms of the sector, but he believes the greater involvement of FSA should still be regarded as a positive.
“It is the FSA’s job to ensure that the interests of the client are protected. We cannot escape the fact that some SIPP providers have tainted the SIPP market by putting short term new business and/or profitability before long term sustainable business goals. But, although a few might have ruined it for the many, there are still a large number of perfectly well run, respectable, resourceful, profitable and stable SIPP providers who can offer the consumer and the IFA plenty of choice in a wide market.”
Dentons has experienced strong growth in its new business – up 28% in 2012 versus 2011 – with a good number of new IFAs using the provider for the first time in 2012. Its own SIPP offers access to some 70 platforms and DFMs – right the way through to complex commercial property transactions and unquoted equity.
Critical to business, says Tilley, is the due diligence put in to make sure that, whatever asset is proposed, it can be accepted, acquired, held, valued and disposed of efficiently and practically. “We recognise that in the market we deal, IFA advice is crucial so we gear our SIPP, our website and marketing towards IFAs to make it as simple as possible for them to understand what we can do and how we can help them.
Demand for commercial property in SIPPs is strong, with around 50% of new SIPPs in the last four months looking to have an interest in direct commercial property. “From our perspective, if you are not utilising the investment flexibility of a SIPP, there are less expensive platform arrangements that will suit. We rarely if ever accept a client with less than £50k pension assets and our average client size is around 10 times than that,” says Tilley.
No Stopping the Train
None of the experts we spoke to believe that there is any chance of the SIPP train stopping any time soon, as so many pensions investors have become disillusioned with the performance of standard pensions.
“SIPPs have been seen as the opportune product to sweep up past pensions and engage more fully with the flexibility that they offer,” says Denton’s Tilly. “And this key driving factor will remain. Despite hitting a million SIPPs, the market is far from saturated.” But even so, he shares some of the reservations about the FSA’s proposals.
The industry body AMPS itself has robustly rebutted the FSA’s capital adequacy proposals, insisting that purely looking at size of assets under administration is not necessarily a good measure of the resources necessary to effect a controlled wind-up of a SIPP company, should it ever be necessary.
“There are several alternatives that have been put forward which we think better fit the remit of protecting the consumer,” says Tilley. “However, some are quite far from the FSA original proposals.” The FSA needs to give appropriate consideration to the weight that AMPS deserves, since it represents over 55 SIPP provider firms. “It may well be that if the FSA take these points on board it might issue a further consultation, but I suspect they will jump straight to a final outcome.”
“What is hopefully clear is that, as a result of the publicity that has surrounded capital adequacy and SIPP due diligence requirements, there will be fewer clients duped into misrepresented esoteric assets – and fewer SIPP providers agreeable to accepting them.”