Two readers respond to Abraham Okusanya’s article about what he views as an underlying weakness in the Sipp market.
Zachary Gallagher, chairman, Association of member-directed pension schemes
Abraham Okusanya’s recent article in New Model Adviser® might have given readers the impression there is no hope of survival for smaller Sipp operators.
Okusanya wrote dismissively of unsustainable ‘mom and pop’ Sipp operations, whose demise he said were a good thing.
But the breadth of Sipp operator types in the marketplace suggests plenty of customers are still very happy to be looked after by smaller operations.
Plenty of smaller Sipp operators have grown and survived by tailoring their overheads to their income. ‘Small’ and ‘unsustainable’ are not necessarily synonymous.
Being larger simply means there is more to cut back on when times turn challenging. Economies of scale can of course help the larger outfit, but some customers are happy to pay a premium for familiarity and for a certain style of service. Not that the largest are necessarily the cheapest.
Capital adequacy rules
Particularly baffling is the fact that the Financial Conduct Authority (FCA)’s year-old, redefined rules on capital adequacy seem to have encouraged commentary such as Okusanya’s. If Sipp operators, whatever their size, have successfully accommodated rules that might dramatically have increased their growth-inhibiting capital requirements, perhaps the market is in healthier shape than Okusanya imagines.
The new rules were intended principally to ensure an orderly wind-down of a Sipp operator that is leaving the market; not to make a wind-down more likely. The sensible should always favour competition over cartel or monopoly, and we should remember that the FCA has a statutory responsibility to promote competition.
We should remember also that the capital requirements are predicated in large part on assets under administration, not on Sipp operator size. Leaving aside the diminishing distraction of non-standard assets, a healthy Sipp book should mean a healthy capital requirement within a healthy Sipp operator.
Any Sipp operator is at risk of going out of business. But the capital adequacy rules, coupled with the principle that a Sipp member’s assets are independent of the Sipp operator, are designed to protect the customer from harm. IFA due diligence is about far more than headline capital assumptions.
Martin Tilley, director of technical services, Dentons Pension Management
Finalytiq’s SIPP Financial Stability Guide shows the slide in Sipp provider profitability from the highs of 2012/2013 appears to have been arrested. It would seem that the loss of interest rate trail that contributed to previous profits has now be replaced by genuine fee-generated business.
It is, however, important to understand how an individual Sipp provider’s profits are generated and how they can be sustained, bearing in mind other factors influencing the market, such as amendments to propositions and the potential inconsistency of treatment of non-standard investments.
Liability could fall on a Sipp provider who holds non-standard assets that may, for whatever reason, become ‘toxic’. The report suggests that as much as 20% of non-standard assets held could become a burden, either through increased administrative costs or as a direct financial liability.
My view is that this generalisation might be an exaggeration. Some providers might have more exposure than others and advisers would be wise to incorporate questions in this regard as part of their due diligence process.
On a more positive note, the pension freedoms have been a boost to the Sipp market, being driven by a surge of transfers from defined benefit schemes. Although the majority of these transfers are flowing into platform-based Sipps, some (quite often the larger transfers for high net worth individuals) may see a proportion of the transfer finding its way into assets not capable of being held on a platform.
While the FCA is reviewing the processes to ensure good consumer outcomes, Sipps will undoubtedly benefit from the recent and continuing trend for individuals to have control of their retirement capital.