New capital adequacy requirements for self-invested personal pension (SIPP) providers are due to come into effect on the 1 September.
Although the rules were announced in 2012 and businesses have had four years to alter their finances accordingly – most commentators think there will be further changes after the deadline as the industry comes to terms with the impact of the legislation.
The regulator has said that all SIPP operators must increase their minimum capital holding from £5,000 to £20,000, with SIPP operators dealing with non-standard assets (such as unquoted shares, for example) required to increase their capital by more – depending on how many non-standard assets they hold.
The capital is intended to cover the costs faced by an operator if it is forced to wind down in the event of financial difficulty.
Customer focus
The rules were introduced in this way because companies with more non-standard, specialist assets are likely to take longer to find a buyer than those holding a more standard book. The capital will mean specialist providers can support customers during the sale process.
As FinalytiQ founder Abraham Okusanya explained, transfer of standard assets is very swift because the Tax Incentivised Savings Association (TISA) has created software that enables electronic pension transfers on these assets. There is no such system for non-standard assets.
According to Okusanya, SIPP operators have seen their capital requirements increase from between 70% to 800% as a result of the new rules. The firms that have been hardest hit are those with the greatest proportion of non-standard assets such as gold bullion and unquoted shares.
These increased costs have resulted in a flurry of acquisition activity in the run up to the deadline with several smaller SIPP providers selling up because they are unable to afford to keep the required capital in reserve.
Deals have included Hornbuckle parent Embark Group’s purchase of the Rowanmoor Group and Talbot and Muir’s acquisition of the SIPP and small self-administered scheme administration business of Attivo Group earlier this summer. Curtis Banks Group also recently acquired the SIPP business of European Pensions Management (EPM) which went into administration in June.
But activity of this sort isn’t new: non-standard SIPP operators have been selling their books for some time now, with 2015 seeing the largest number of SIPP acquisitions of any year in history.
And market consolidation is set to continue according to most commentators. Okusanya said: “There are 40 to 50 off-platform SIPP providers in the market and in a report we conducted into 20 of these, 40% of these only had a fair or poor rating in terms of financial viability.”
He added: “There hasn’t been as much consolidation as expected, but if talks haven’t resulted in a tangible deal already it’s possible that buyers are holding on until sellers get desperate to ensure a cheaper sale, even if this occurs after the deadline.”
Talbot and Muir head of pensions technical Claire Trott also said she thought that sales would continue.
“There are more sellers than buyers meaning it might take some SIPP providers some time to move out of the market but they will be forced to. Holding the capital is one thing but there are other big challenges too such as assessing the worth of assets on a book and recalculating this regularly,” she said.
“In addition, holding the equivalent of a year’s revenue in cash reserves is just not sustainable for a small business.”
Okusanya argued that this thinning process would result in approximately ten main providers left standing. “It will be a painful process but over the long term, this will be a good thing.
“It will be easier for advisers to make comparisons and this will provide greater assurance to investors.”
Welcome move
Despite this consolidation, the capital adequacy rules have been largely welcomed by the industry.
The consumer detriment caused by the recommendation of suspect non-standard assets for SIPPs has been widely publicised in recent years.
Increases in the Financial Services Compensation Scheme levy for 2015/16 to £319m from a forecast £287m were “primarily because of a rise in claims related to SIPPs,” according to the regulator when the hike was announced in April 2015.
Similarly, Financial Ombudsman Service complaints related to SIPPs increased during 2014 and 2015 and are continuing to do so. They rose 9.4% in the second-quarter 2015 compared with the first quarter, and the watchdog upheld 66% of these.
Dentons director of technical services Martin Tilley said: “Something needed to be done, capital was too shallow and some very weak firms were operating in the market. The rules have sorted the men from the boys and those that were strong are now in a very strong position while others have left the market.
“The rules will help prevent SIPP providers dealing with problematic assets and strengthen the confidence advisers have in the industry.”
Although the industry is largely positive regarding the new capital adequacy requirements many think the way the rules have been implemented is flawed. Tilley said: “The method of capital adequacy calculation is unnecessarily complex and puts more pressure on companies than there needs to be. Companies now have to work out the value and proportion of assets held on book and this is time-consuming and expensive to implement.
“Yes, the number of non-standard assets is important but their value is immaterial because disposing of them will take the same amount of time and resource irrespective of value.”
Trott concurred with this: “A company has to invest considerable time working out how much the assets that they hold are worth. This is a lot of work, and much of it is not needed. For example, the value of a property, where there is investment in residential property, is a matter of opinion until sold. Getting up to date valuations is of no benefit to anyone.”
Tilley added: “This issue was raised in the consultation and many agreed that there are better options – such as assessing the numbers of SIPPs and numbers of non-standard assets. But this option was not taken. The regulator’s decision has already driven up the cost of non-standard SIPP and is likely to do so further.”
Tipping point
Another concern around the introduction of capital adequacy is that it might result in a crunch in the market.
Okusanya said: “The larger companies might be picky when choosing which books to buy. With all the exits in the marketplace, it becomes increasing likely that we will see one go out of business with no one prepared to take over. The more esoteric investments will take much longer to place. This almost happened with EPM – there was no buyer standing by for a while.”
Aviva head of policy John Lawson agreed that this was a likely scenario.
“It might be quite difficult for firms to unwind and liquidate portfolios, particularly if holdings are in property or unquoted shares,” he told Retirement Planner. “No suitable buyer could give rise to a crunch in the market. These problems are likely to play out over the coming months.”
However, he explained that because clients that have invested in such holdings are also likely to be trustees of the same holdings these problems won’t come as a surprise to them.
“Clients of this sort are likely to be involved in the liquidation of assets and so well abreast of the situation. That said, a crunch of this sort would still be problematic. It would probably force more general advisers and investors to rely further on standard assets such as stocks and shares where they might otherwise have been more adventurous.”
He added: “Some argue that a larger entity might move into the market to manage these SIPP books but this is not particularly likely as larger providers tend to veer more towards the mainstream. At Aviva, we don’t hold any esoteric assets. It’s difficult to create standardised processes around these holdings.”
Overall, the result of the requirements will be two-fold according to most commentators. First, they will put the price of non-standard SIPPs up, and second, with so many providers leaving the market, advisers will be more inclined to deal with larger well-capitalised firms than the smaller bespoke SIPP providers.
Lawson said: “Insolvency or potential insolvency is a big issue for advisers. Having to find a new home for customers will be a big hassle, and advisers won’t be able to charge for this as they recommended the SIPP provider in the first place.”
He added: “Similarly, the increased price of non-standard SIPPs will also be a deterrent for advisers when choosing a provider.”
But most think there will continue to be a market for the non-standard SIPP.
Tilley said: “Yes, there will be fewer bespoke SIPP providers, but this handful of providers will take on a higher proportion of non-standard assets. In general, the rules have created the building blocks for a stronger more concentrated industry.”
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