There may be challenges currently affecting the SIPP market, but Andrew Leggett believes there is light at the end of the tunnel
I'm one of those who were too quick to predict consolidation in the self-invested personal pension (SIPP) market. While there have been examples (Suffolk Life bought by Legal & General, James Hay bought by IFG), it has so far amounted to less than we expected.
At Defaqto, we gather data about financial products in many markets, one of which is SIPPs. While this is certainly a significant market, it is fair to say that others we cover are very much larger.
Yet this niche has consistently had a lot more products and providers than many others for years. How has it resisted consolidation for so long? And what bigger picture things should advisers be looking out for in this market beyond detailed questions of product features?
The SIPP market has grown strongly for many years, both in terms of assets under administration (AUA) and plans administered. A growing market can obviously support a larger number of providers than a static one, but there are some interesting things to note in the data.
For example, looking at the FSA's recent product sales data, we can see that between Q1 2010 and Q1 2011, total sales of SIPPs were 188,388 with year-on-year growth of 15%. This compares to personal pensions, where the figures were 229,968 and a fall of 10%.
What is more intriguing is the market share of the top five providers. In SIPPs, it is quite a concentrated market with the top five taking 73% - pretty consistent with previous years.
The remaining sales are split between the remainder of the 116 providers the FSA record in this market. That compares with 76% for the top five personal pension providers and 37 providers. The implication is clear: for many SIPP providers, the pickings are a good deal slimmer than the market growth figures suggest.
Our own data suggests that the number of providers has remained fairly constant - what we have tended to see is more new products, especially simpler SIPPs with lower headline fees, mostly from existing players.
According to our data, the number of SIPPs available has increased by 17% since 2010. There has been some industry consolidation, too. Pointon York and Curtis Banks have taken over some small bespoke providers, Pointon York is now up for sale and James Hay has just broken off talks.
Our data also shows the headline set-up and annual fees decreasing (by about a quarter and a tenth respectively) over the past five years. Having cast some doubt on the idea that there's growth for all, I'm now going to cast some doubt on falling fees.
Not that I'm suggesting SIPP admin fees haven't been falling -rather, many SIPP providers have been supplementing their revenues from alternative sources.
In our White Paper What the Platforms Policy Paper means for SIPPs, we made the point that the FSA's recent paper on platforms gave an indication as to how the regulator may approach SIPP providers in light of the Retail Distribution Review (RDR).
Some SIPP providers' models work by supplementing the revenue generated from explicit administration fees with revenue (or revenue shares) from other sources. These have the effect of keeping headline fees down and in some cases may also allow for a simpler fee menu. However, supplementary revenue from these sources doesn't sit comfortably with the FSA's approach to the RDR. The low base rate is also affecting the industry.
Many SIPP providers receive a revenue stream in the form of a share of interest paid. But this revenue has been reduced for at least two-and-a-half years due to the very low base rate squeezing providers' shares, even as headline fees have continued to fall.
This issue has attracted the FSA's attention, CP11/03 seeks further disclosure and, depending on the results of the consultation, could go as far as preventing providers receiving a share of interest in future. This would affect providers' revenue and business models.
As a result, SIPP providers will have to look at the sources of their revenue streams and SIPP pricing is likely to change to some extent as a result. This could mean that some sources of revenue will disappear altogether perhaps resulting in commensurately higher pension administration fees. In any event, much greater disclosure will surely be required and expensive investment in illustrations.
Back in January, the Financial Services Compensation Scheme raised a £326m interim levy on the investment intermediation and investment Management sub-classes. This was in respect of several investment failures.
In financial terms, the timing of this was unfortunate as SIPP providers continue to invest heavily in technology to integrate with platforms and DFMs and to deliver more services online. They are also looking at capital adequacy as bigger capital cushions are widely expected here.
Whether coincidentally or not, the FSA has increased its supervision of smaller SIPP providers, surveying 70 during Easter, following 35 up by telephone and reportedly visiting eight of them. If the word in the trade press is right, UCIS forms at least a part of this. Regardless of what is fact and what is rumour, many providers will be looking to increase the level of their scrutiny of investments.
Strengthening controls and bringing in expertise will increase costs. What will not be visible, but is nonetheless most valuable, is better avoidance of expensive issues, such as taxable property and collapsed investment schemes.
All of these factors amount to considerable pressure on SIPP providers. The extent to which this will lead to consolidation depends in good part on the rate the market grows.
Adviser SIPP due diligence
It is important that this is not mistaken for "all doom and gloom". All these changes coming at once may alter the lists of individual winners and losers among providers, but overall SIPPs are likely to remain a winner.
With so many SIPPs having been RDR-ready even before the review was conceived, most see them continuing to strengthen their place in the pensions industry.
Along with the move to recurring business from long-term, financial planning-based relationships and the long-term nature of pensions, this means that a great deal of attention should be given to working with the right partners.
There is an increasing segmentation between technology-driven SIPPs (characterised by platforms, DFMs and execution-only dealing services, enabling investment in collective and stock market investments) and bespoke SIPPs (characterised by investments such as commercial property, unlisted shares, gold bullion and other esoteric investments).
There is also a clear distinction between the pre- and at-/post-retirement segments. This will affect the criteria advisers will look at to determine who the right partners are.
While the long-term nature of pensions and client relationships demands that sound long-term provider partners be identified, the current flux suggests recurring review of those partners, including for existing business, is good practice: advisers may need to respond to change.
We believe there are three key steps that intermediaries should focus on to support effective SIPP selection:
- Identifying the type of SIPP provider an adviser should partner with to ensure a fit with the nature of their business
- Within this, identifying specific SIPP providers that they can establish an effective long-term relationship with, and
- Selecting the right SIPP by considering the key features of different options and assessing which SIPP best meets a client's (or client segment's) needs.
Within these areas, there are a number of key elements that advisers should consider when performing due diligence, including:
- A SIPP provider's financial strength
- The SIPP provider's partners, such as platforms, DFMs, bank(s) and technology partners
- The nature of a provider's administration and service proposition
- The level of service that a provider offers advisers, and
- The investment types allowed and the investment partners that can be accessed.
For those who would like further reading, our recently published Guide to SIPPs explains these points in greater detail and can be downloaded, free of charge, at www.defaqto.com/adviser/ifa/guides.
Andrew Leggett is an insight analyst at Defaqto
Senior Managers Regime
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