18th March 2014
The Sipp market is facing new regulations and some firms are now hiking charges. Some smaller Sipp companies may decide to shut up but where does this leave Sipp investors asks financial journalist Tony Levene.
Sipps – Self Invested Personal Pensions – enable individuals to control their own retirement pot, instead of leaving it to a life insurer. But the watchdog, the Financial Conduct Authority believes they need better regulation if consumers are not to suffer detriment. And that extra layer could lead to higher costs.
The product appeals to those who tick one or more of the following:
But whatever the reason might be, Sipp holders now face a new uncertainty over pricing, regulation and whether the market can continue to sustain the 120 providers the then-regulator Financial Services Authority found in a 2012 “thematic review”. Half a dozen firms, however, control more than two-thirds of all Sipps – their number includes AJ Bell, Alliance Trust, Hargreaves Lansdown and Standard Life.
Prices set to rise
Friends Life announced a 21 per cent price rise earlier this year. This provoked outrage in the all important adviser market because Friends, even though it had played by the rules, did not offer sufficient time to allow some investors to switch. The furore forced Friends to extend the deadline, leaving the market to see the move as botched, causing reputational damage. But the fee hikes, even if delayed by some weeks, remain.
With less fanfare or comment, Alliance Trust and Savings continued its price rise policy. Sipp investors see annual charges rise 15% to £186. Patrick Mill, ATS managing director, said the increased charges will enable the firm to maintain the “high quality” service it delivers to its customers. Mill also blamed regulatory changes for increasing fees. From this April fund super-markets will no longer be able to accept commission payments from fund providers.
Friends Life also blamed regulation. “We are increasing the policy fee of some Sipp products to cover the additional costs incurred as a result of Client Money and Asset Return regulation. This increase follows a number of years where no fee increases have been required,” it said.
Why does the FCA want increased regulation?
Sipps have only come onto the watchdog radar as a potential source of customer detriment in the last three or so years. Until then, the model was seen as low risk. The regulator is uncertain on how to go forward. The FSA review in November 2012 had a list of concerns but there have been delays in pointing the way forward – the most likely next announcement on the vital issue of capital adequacy will be in mid-summer.
Why is “capital adequacy” key?
Capital adequacy means having enough financial backing for an organisation to survive a particular adverse scenario – such as a high percentage of customers moving their assets away. But it is also regulatory code for forcing smaller providers to find more cash to back their activities or squeezing them out of business. The watchdog knows that the big Sipp firms can easily meet any new requirements, assuming they are not there already. It is a different case with fringe operators.
The FCA’s concern is with the large number of small Sipp providers, especially those that specialise in “non-core” assets such as commodities or farmland.
Boiler rooms selling esoteric investments such as carbon credits or rare earth minerals often state that these are “Sipp-compliant” and, as Sipps are FCA-regulated, the implication is that these investments are somehow under the aegis of the watchdog. These are often channelled through a Sipp wrapper from a fringe operator.
Additionally, while the FCA insists that only so-called “sophisticated investors can put money into unregulated collective schemes, unscrupulous advisers have tempted unsophisticated pension savers out of known assets into obscure offshore schemes with promises of unrealistically high returns.
There has been a substantial increase in these non-standard investments –a number are linked to financial crime, money-laundering and misrepresentation. Some of the firms that the FCA will eventually say must pay up or ship out of the market are known to have poor, sometimes barely existent, risk control capabilities. Some Sipp providers have run “pension unlocking” schemes, considered detrimental to consumers.
What will smaller Sipp providers do?
If they can’t find the extra capital, their only route is to sell up and shut down – a process politely known as “consolidation”. Customers with esoteric assets will either have to find another Sipp wrapper firm which could charge more, or divest themselves of holdings that mainstream providers will not accept. Many are now campaigning for a return to a permitted investment list, effectively banning alternatives other than commercial property.
Investors with such a Sipp should consider a fresh provider now – it is easier to switch when the pressure to do so is less than it will be once the FCA reveals its new capital adequacy thinking later this year. This could also put some advisers who have sold non-mainstream products on the spot, laying them open to mis-selling allegations.
Research group Defaqto forecasts that the present provider numbers are unsustainable.
Does price count for everything, anything or nothing in a Sipp?
There’s an obvious relationship between costs and long term investment results. The basic charges to consider are initial set-up, annual running costs, and the expense of moving assets in and out of the fund – transaction fees (see table). Investors also have to look at the services they require such as valuation of shares which are unquoted or listed on an obscure foreign market. Many, such as those mainly interested in income drawdown, are happy with plain vanilla UK funds where a Sipp wrapper should be at the lower end of the price range, available from a number of mainstream online “commoditised suppliers. These will have no difficulty in meeting a new regulatory framework.
Research group Defaqto believes that market pressure will exert a two way pull. Fees will be pushed lower for basic products due to the high level of competition for this easy to run, lucrative business.
But fees for wrapping esoteric products in a Sipp are set to rise as the FCA is likely to link capital adequacy to exposure to non-standard assets. Those who want, or have been convinced by advisers that they want, non-core assets will have to pay for the privilege.
What it costs to switch. Trade website FTAdviser.com has done some excellent research into the issue of transfers below.
|Provider||Transfer in (per holding)||Transfer out||Comm property in||Comm property out|
|ATS||£50 plus VAT||£150-£200||N/A||N/A|
|Aviva||Free||Free||£1,450 (service provided by Suffolk Life)||£600 (service provided by Suffolk Life)|
|Barnet Waddingham||Time-cost basis||Time-cost basis||Time-cost basis||Time-cost basis|
|Dentons||Time-cost basis||Time-cost basis||Time-cost basis||Time-cost basis|
|James Hay||£50 to a maximum of £200 per annum||£150||£600-£800||£450-£650|