SIPP Capital Adequacy – One Year On

This article first appeared on the FT Adviser website on 24^th October 2017

Andrew Duthie - Insight Support Analyst (Wealth and Protection)

I have been working at Defaqto for nearly 12 years and I am fairly sure that for most of that time the word has been that SIPP consolidation is coming and that the number of providers, and SIPPs, in the market is unsustainable. The reason it always comes up is because it has never really happened. When the FCA published PS14/12 in August 2014 confirming the new capital adequacy rules that SIPP providers must meet from 1^st September 2016, it was widely seen by many as the catalyst to finally kick-start the consolidation process. So, one year on what does this new, leaner SIPP market look like? Well, the answer is, not much different from last year or the year before that. In fact, Defaqto Engage data shows that as at 1^st September 2017 the number of providers in the market was 85 whilst on the same date in 2015 and 2016 it was 82 suggesting that actually the market has grown not contracted.

At the same time, Defaqto Engage data shows assets under administration within SIPPs has grown by a third from 1^st September 2016 to 1^st September 2017 spread across all the SIPP products Defaqto collect data on. This shows the continued popularity and importance advisers are placing on pension products, and SIPPs in particular, for retirement planning but also now inheritance planning as a result of the new rules on death benefits for beneficiaries in light of Pension Freedoms.

We use the term ‘providers’ above to describe those in the market as shown on Defaqto Engage but it may be more accurate to refer to them as brands. There has been some consolidation in the market and though individual brands remain, there may be one larger parent that owns multiple brands.

Let’s go back to 1^st September 2015, 12 months before the new regulations (as it was around this time that a couple of headline takeovers took place) and look at the providers in the market then and match them each up to a parent. For example, in 2015 Cofunds and Suffolk Life were both owned by Legal and General who also had their own SIPP but were listed as 3 different brands though there was a single provider. In 2017 Legal and General still have a SIPP, in turn Cofunds are now owned by Aegon and Suffolk Life by Curtis Banks both of whom were already in the market in 2015 with their own SIPP products – so despite the fact there are now three SIPPs with three different owners these changes have no net effect on the number of brands in the market but importantly also has no effect on the number of providers as Aegon; Legal and General and Suffolk Life already existed in 2015.

This is not the case with providers like Hornbuckle or Rowanmoor who were separate entities in 2015 but are now both owned by Embark Group who did not appear elsewhere on the SIPP table in 2015 and do not now in 2017 and so therefore both these two brands and providers now come under one, new, provider. In carrying out this exercise we see that on 1^st September 2015 there were actually 73 providers on the Defaqto SIPP table in Engage compared to 70 in 2017. These figures include both advised and direct SIPP providers and include the various mergers and takeovers that have occurred over the last 48 months, including the merger of Aberdeen and Standard Life which is not driven by the SIPP business.

So in truth the number of actual providers (who may own one or more brands) has fallen slightly 12 months after the new regulations compared with 12 months before. The build-up and aftermath of the 1^st September 2016 changes led to a bit of a shake-up, but we have seen nothing like the contraction predicted or claimed thus far.

There are a few SIPPs that have actively ceased trading since a takeover or merger but for the most part their brands continued in their own right even if the ownership has changed. On 1^st September 2015, there were 133 SIPPs on Engage falling to 132 on 1^st September 2016 and as at 1^st September 2017 there were 137 which shows that despite the actual number of providers shrinking slightly, the range of product choice has not. It is worth mentioning at this stage that Engage is a dynamic database and changes are made every day. On rare occasions Defaqto will discover, what to us is, a new SIPP and/or a new provider which we previously did not list but already existed in the market which could account for any minor (but not significant) increase.

There have been no obvious indications of the acquired SIPPs being closed or merged with the new providers existing product portfolio in the near future but simple logic would seem to suggest that at some point similar products being administered would need to be considered for a merge or closure of one or the other, or at least a re-design to service different client needs. One would assume the drawbacks in doing so could be the incorporation of differing administration systems and the inevitable cost that would entail, particularly if the products themselves continue to be commercially viable in their own right.

There have been reports that some providers may have not met their capital adequacy requirements or that they have not reported their position correctly to the regulator. This inevitably leads to speculation that some are struggling with the new rules and that further consolidation could be around the corner. This would seem a fair assumption to make, but what is surprising is that a SIPP provider can be trading in the market post-September 2016 and not have got their house in order with regards capital adequacy, these changes were heavily trailed by the FCA and inescapable in the run-up.

The FCA themselves have not commented on which providers it may be or what action has been taken, so without this knowledge it is difficult to know what happens next. As the FCA keeps its powder dry on that one, gossip will continue. With this in mind, It would seem foolish to write-off any future consolidation taking place as a result, but it is debatable as to just how significant any subsequent closures or mergers may be when you consider the relatively small movements thus far.

What Defaqto has noticed starting in 2015 and continuing through 2016 to now has been providers removing access to certain investment types, particularly those on the non-standard list published by the FCA. 22 SIPPs (20 providers) have ceased permitting clients to invest in asset types not on the standard list quoted in PS14/12 since 1^st September 2015. That being said, this also means that less than one fifth of the market have felt the need to remove permitted investments, though it should also be noted that as at 1^st September 2017, only 33 SIPPs permit investment in unlisted shares but more will permit futures and options, contracts for difference and hedge funds for example.

Some providers have clearly decided that offering non-standard assets is simply not worth the extra capital that would need to be held, not to mention the additional administration and carrying out the necessary due diligence. If anything, the new capital adequacy rules have meant that providers have taken the decision that they should re-focus on what they are good at or are prepared to accept, rather than trying to be all things to all men (and women).

Defaqto’s Star Ratings award 5 Stars for the most feature rich products, but we very much advocate that a product not offering all the bells and whistles is no lesser a product, it is just not as comprehensive but could be absolutely suitable for a specific client. It is with this in mind that we believe providers removing investment options will have carefully considered their proposition offering to clients and will consciously be adjusting their market positioning. Equally, we do not believe that providers still allowing non-standard investments should cease doing so, if the provider feels they have the correct procedures in place to do so then there is no need to stop offering them. It is also true that often SIPP providers offering these investments will typically be more expensive which is representative of the additional administration that has to take place.

So, in conclusion, one year on from these new rules Defaqto Engage clearly shows that despite the headline grabbing takeovers, rumours and predictions, the SIPP market landscape actually looks very similar to that which existed 12 or even 24 months ago. Sure, the rules have been the cue for some providers to leave or sales to be made but not to any great extent. The really interesting aspect to consider will be to see how the market looks after consolidator providers begin to review their existing portfolio or flex their muscles further, but in truth none of us really knows when this will be, if at all. At some point, we may expect the FCA to confirm those providers who have not met their capital requirements and what action they plan to take as a result and whether this means the said providers look to leave the market or take steps to rectify the matter and remain.

As part of their due diligence, advisers should be aware of the ownership structure of the SIPP they are placing their clients business with and are right to ask questions about its long term sustainability. It is possible that answers to any due diligence questions may need to be taken in the context of whether the provider would be likely to disclose if they do not meet capital adequacy requirements or carry out the right due diligence themselves on prospective investments.

Whilst it’s widely acknowledged that PS14/12 has and will continue to be a catalyst for some of the M&A activity in the SIPP market, Defaqto data shows that its shrinking and market consolidation has been somewhat prematurely exaggerated and advisers need to be aware of the continued level of choice when making recommendations to their clients as much now as ever before.