Falling profit margins at non-insured self-invested personal pension (SIPP) providers should raise due-diligence concerns for advisers ahead of capital adequacy rules coming into force, analysis from FinalytiQ has said.
Its Financial Stability Report, written in conjunction with SIPP industry expert John Moret, said pre-tax profit margins of non-insured SIPP providers dropped from an average 30% in 2012 to 20% in 2015.
The in-depth report flagged potential problems for certain providers ahead of the introduction of SIPP capital adequacy rules on 1 September.
The report analysed large, mid-sized and small providers operating in the SIPP market and found 13 of the 18 providers who responded – that make up more than 90% of the non-insured bespoke SIPP market – were profitable, while five were loss-making.
This compares with 17 of the 18 providers who were profitable in 2012, it said.
The report said low interest rates, strong competition and capital adequacy rules were to blame.
It also showed a number of providers are operating with very low margins, making them susceptible to further market and regulatory pressures. The report said Hornbuckle and Rowanmoor, for example, operate at 0.3% and 7.5% pre-tax profit margins respectively.
FinalytiQ director Abraham Okusanya (pictured) said adviser due diligence had never been more important.
“To meet their regulatory and professional obligation to clients, advisers should put SIPP providers under greater scrutiny, with a particular focus on financial stability and long-term viability.”
However, he also said there were several providers with a track record of profitability, above-average profit margins and a healthy mix of assets.
“We can expect them not only to survive but to thrive in the increasingly competitive landscape,” said Okusanya. “Those who are consistently loss-making or operating on very thin margins will evidently struggle to absorb competitive and regulatory shocks; they’re vulnerable to acquisitions by stronger players.”
Dentons Pension Management director of technical services Martin Tilley said: “Several ratings agencies have looked at SIPP operators individually, but this is the first time a detailed analysis of a good number of providers has been pulled together in one place. Immensely useful to advisers in understanding the moving nature of the market and the key players within it.
“So far the surveys that have been conducted have only focused on which SIPP providers will meet the new benchmarks and providers are saying that they will.
“Providers that would have struggled have already been snapped up in consolidation and others are reportedly still on the market.
“Questions about SIPP providers’ method of capital adequacy calculation should be asked. Funds required to back capital reserves cannot be used for functions such as investment of capital into IT systems, marketing, product development and maintaining the infrastructure to grow whilst continuing to deliver customer service. Simply meeting the benchmark might be a sign of how long a provider could be operating post-September.”
Higher grade pass?
The report gave each of the 18 SIPP providers a ‘Financial Stability Rating’ of between A and D.
AJ Bell, James Hay Partnership and Mattioli Woods were given A grades.
Xafinity, Dentons, Curtis Banks, Suffolk Life and Talbot and Muir got B ratings.
Morgan Lloyd, Momentum, MW Pensions, Hornbuckle, Barnett Waddingham, Liberty SIPP and Rowanmoor were rated C.
@SIPP, Careys and London & Colonial were given D ratings.
Okusanya added: “There’s no doubt in our minds (and there should be none in yours) that the tectonic plates are shifting very fast in this sector. There will be winners and losers.
“We understand that providers might feel uncomfortable being put under the spotlight, but it’s a professional and regulatory obligation for advisers to be thorough in their due diligence.”
However, @SIPP quested the report.
A statement from the firm said: “Any insight into the self-invested pension market is to be applauded, but it is important that information is accurate.
“As we advised FinalytiQ, ahead of publication, the data used to assess @SIPP’s financial strength and capital position is out of date and incomplete. It relates to an old entity which no longer exists.
“In common with most of the SIPP industry, we did not complete the questionnaire and therefore our rating could only be derived from very limited and historical information. FinalytiQ’s findings are not at all reflective of @SIPP’s current corporate structure and financial position.”
Six-point plan
Okusanya also laid out a six-point plan to improve SIPP regulation.
He said: “I believe there is a case for looking again at the regulatory framework for SIPPs to see whether its effectiveness in preventing investment scandals and scams can be improved while at the same time continuing to protect SIPP investors from the risk of a provider insolvency or similar demise.”
1. Redefine SIPP – exclude those that only allow investment in mainstream/standard investments;
2. Enforce new “fit and proper standards” on personnel working with all existing and new SIPP operators (as defined in 1 above);
3. Introduce a new specific permission to allow a SIPP operator to accept “non-standard” investments on a “non-advised” basis;
4. Introduce “threshold” reporting by providers on adviser introduced (regulated or not) SIPPs – restrict or prevent further business until FCA confirmation received;
5. The SIPP industry to provide (and fund) an investment due diligence mechanism working with the FCA;
6. Reassess capital requirements which would only apply to the newly defined SIPPs.
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