FEBRUARY 2012 |
www.opp.org.uk WORDS | Lee Smith
BUSINESS
INVESTMENTS | 37
property investment markets, and one of the most popular of those products is the SIPP (otherwise known as self-invested personal pension plan). This is an investment niche that has consistently had a lot more products and providers than its rivals. And it has been one of the biggest personal investment sectors for many years. So, given its size and status as a niche, how has it managed to resist consolidation for so long? And what ‘bigger picture’ things should advisers be looking out for in this market, beyond detailed questions about its 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 product sales data in the UK from late last year, 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 fi gures show 229,968 and a fall of 10%. Clearly, there is
Challenging the times T
here are a number of businesses that gather data about fi nancial products in the overseas
plenty of money moving in the direction of SIPPs at the expense of a normal personal pension plan. But what is also of interest is the market share of the top fi ve SIPP providers. This is a specialist sector with the top fi ve companies taking 73% of the market - pretty consistent with previous years. The remaining market share is split between the remaining 116 providers. That compares with 76% market share for the top fi ve personal pension providers across 37 companies. The implication is clear: for many SIPP providers, the marketplace is a good deal slimmer than the market growth fi gures suggest. Our own homework suggests that the number of providers has remained fairly constant - what we have observed is new products from existing providers, especially simpler SIPPs with lower headline fees.
What could be the challenges? In previous columns, I have often made the point that the FSA’s more 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 had the effect of keeping headline fees down and in some cases may also have allowed for a simpler fee menu. However, supplementary revenue from these sources doesn’t sit comfortably with the FSA’s approach to the RDR.
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, and CP11/03 seeks further disclosure. Depending on the results of the consultation, this could go as far as preventing providers receiving a share of interest in the future. This would affect providers’ revenue and business
“This is a specialist sector with the top fi ve companies taking 73% of the market, as in previous years”
Sharpen | your pencil ... SIPPs are here to stay and many providers are already geared up for the challenge
models, naturally. 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 higher pension administration fees. In any event, much greater disclosure will be required. Back in January 2011, 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 fi nancial 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. The FSA is also looking at capital adequacy and bigger capital cushions are widely expected to be implemented. This will simply mean smaller providers will not be able to comply with the requirements forcing them out of business. Whether coincidentally or not, the FSA has also increased its supervision of smaller SIPP providers, surveying 70 fi rms during 2011, following 35 up by
SIPP providers face a big challenge, but have we been a little too quick to predict consolidation? OPP investment columnist Lee Smith of Project Kudos says yes. He has watched Suffolk Life being bought by Legal & General and James Hay by IFG, but nothing dramatic has happened so far. So ... what comes next?
telephone and reportedly visiting eight of them. If the trade press is right, UCIS forms at least a part of this. Strengthening controls and bringing in expertise will increase costs. What will not be visible, but still valuable, is avoiding expensive issues such as taxable property and collapsed investment schemes.
SIPPs are a winner Don’t get me wrong. It is important to remember that all is not “doom and gloom” on the SIPP front. All these changes coming at once may alter the lists of individual winners and losers among providers, but overall SIPPs are very likely to remain a winner. With so many SIPPs having been prepared and made RDR-compatible, even before the review was conceived, I can easily see most of them continuing to strengthen. Along with the move to recurring business from long-term, fi nancial 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. Choose your supplier carefully and it will go on working well for you. There is a clear distinction between the pre & 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 relationship demands that sound long- term provider partners be identifi ed, the current fl ux suggests a recurring review of those partners. This is just a case of good business practice: advisers always need to respond to change. So, in summary, we are in a time where choosing which SIPP provider or which SIPP Wrapper to work with is absolutely crucial … and the decision shouldn’t be taken lightly. But don’t get hung up on RDR and whether or not SIPPs are about to disappear. They’re not. They’re here to stay. And many of them are already up to the challenge of the changing times ahead.
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