Before A-Day personal pension schemes could only be established by institutions defined by the law at that time.
These institutions would include insurance companies, banks, building societies and unit trust managers.
For non-insurance based personal pensions, let’s call them ‘true’ or ‘original’ self-invested personal pensions (SIPPs), this led to a proliferation of SIPPs being established by banks albeit the administration was carried out by a pension administration company.
This gave rise to the term ‘provider’ and led to those banks providing the default SIPP bank account.
Often monies will flow through the SIPP bank account facilitating investments, paying pension income etc. The interest rates however being paid on such accounts tend to be minimal and particularly in the current low interest rate environment, it is possible that such accounts are not paying any interest at all.
Equally, cash should be seen as an investment in its own right, serving its own purpose for investment diversity.
And so the dominance of term deposit holdings is unsurprising especially if the interest rate being achieved is in excess of inflation or higher than the return on risk-free investments such as gilts.
It has long been recognised that bank account term deposits are there to be held until maturity and that ‘breaking’ them may be not without peril.
Typically a bank will place any term monies into the Treasury market, making the money work harder for them in order to achieve the rates that have been promised as part of the term deposit offering. The money is then tied up within the Treasury market and called upon by the bank at or around maturity.
Of course, we are simplifying the process here but, hopefully, you understand the principle.
Only in exceptional circumstances might the term deposit be broken. Exceptional circumstances generally being death alone!
So why does it matter if a term deposit can be broken or not?
It all hinges on the Financial Conduct Authority’s (FCA) list of standard assets that can be held within a SIPP.
Standard assets as a recognised term came into the discussion back in November 2012 when the FCA first consulted on changes to how SIPP operator firms were capitalised through CP12/33.
It has since been the subject of further guidance from the FCA through PS14/12 (published in August 2014), CP15/19 (June 2015) and Handbook Notice no. 28 (December 2015). These rules take effect on 1 September 2016.
The outcome from the SIPP capital adequacy discussions is such that in order for an asset to be considered as standard, it must meet the following conditions:
- It must be in the list in Table 5.2.3(4)(a) of IPRU (INV); and
- It must be capable of being accurately and fairly valued on an ongoing basis and readily realised within 30 days.
The top three assets from the table described above are bank account deposits, cash and cash funds. However, being in the list is, in itself, not enough.
The asset must be able to meet condition 2) and be capable of being realised within 30 days for it to be considered as a standard asset if held within a SIPP wrapper.
Now to the ‘average joe’ one might consider that cash is cash and, therefore, it makes little sense to differentiate between one type of bank account and another, however the FCA has clearly made a distinction between the two.
So SIPP operators have temporarily stopped scratching their heads around the anomaly and operator firms across the land are now reviewing all of their term deposits to understand whether the bank has employed a break clause in its terms and conditions for the myriad of term deposits that are in existence.
Those that are found to be without a break clause and cannot be broken under any circumstances will have to be classified as a non-standard asset. And for term deposits going forward it is likely to be the first piece of information that the SIPP operator goes looking for.
So what does this mean for the consumer and for the SIPP pension scheme member? The answer is simple, we don’t yet know.
It could mean competition is stifled, investment choice is restricted and non-standard bank accounts (as defined by the FCA) come at an additional cost for the consumer.
The FCA has said it will continue to monitor the position and we hope that they will, if only to correct what we see as an unintended consequence of the change in the rules.
Elaine Turtle is director at DP Pensions
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