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The best-laid plans often fall apart due to one unforeseen circumstance and the Brexit decision may be one such event.
When the Financial Conduct Authority (FCA) decided that the new self-invested personal pension (SIPP) capital adequacy requirements should be based upon asset value and asset type, a long-running debate ensued about the categorisation of commercial property and whether this would or would not constitute as a non-standard asset.
This categorisation would have implications, increasing the levels of capital required by the providers.
After a period of time, it transpired that the SIPP industry did find a consensus, in that the vast majority of directly held commercial property is now deemed a standard asset.
30 days and 30 nights
This followed the FCA’s handbook update in December 2015 which stated: “When determining whether an asset is capable of being readily realised within 30 days, a firm should consider whether the transaction can be concluded within that time limit in the ordinary course of business. For example, such a date can be the date of exchange of contracts or any other date when both parties have unconditionally agreed to undertake their contractual obligations to realise the asset.”
The reference to 30 days relates to the definition of a standard asset, which is “capable of being accurately and fairly valued on an ongoing basis, readily realised whenever required (up to a maximum of 30 days), and for an amount that can be reconciled with the previous valuation”.
Also included within the definition of standard assets, however, are units in regulated collective investment schemes.
‘Unforeseen anomaly’
Although we have two clear statements, an unforeseen anomaly now exists with regard to regulated collective commercial property funds, many of which are now suspended effective from early July, following an unexpected spate of withdrawals which wiped out the funds’ liquidity. At the time of writing, most of these funds continue to be suspended over six weeks later.
To take as an example Aviva, the firm stated this month that its fund could remain suspended until 2017. Clearly, although this statement is not categorical, if it were to remain suspended the fund would fail to meet the requirement to be disposable within 30 days and therefore would appear to harbour a characteristic of a non-standard asset, while at the same time being a regulated collective where accordingly it does not.
Other funds have allowed withdrawals to take place but have imposed a “fair market value adjustment”, being their estimate of the likely reduction in valuation should it be necessary to sell property assets to meet the demand of withdrawal requests.
Henderson, for example, imposed such an adjustment which it has gradually reduced where withdrawals have been permitted, while also stating that it intends to review the fund every 28 days.
Such an adjustment would appear to fall foul of the “amount that can be reconciled with the previous valuation” statement. The firm has not, as yet, proposed a target date for the retraction of the fund’s suspension.
Different points of view
To date, SIPP providers have expressed differing views on this matter but it would seem that the majority are intending to continue to categorise such funds as standard assets, by virtue of their sitting in the regulated collective category.
This might be simply because to take any alternative view would result in the redesignation of such funds and in turn would result in a huge task of filtering out and identifying those funds that would be caught from the platforms and discretionary accounts in which they are currently held.
If it were considered necessary, there would need to be a common approach so that all providers were able to act uniformly and this would need to be instigated by the regulator, who would win no favours for not only the work involved but also for the increase to firm’s capital adequacy requirements, which might be required purely for the term in which the funds remain suspended.
Martin Tilley is director of technical services at Dentons Pension Management
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