Better Business: 20 years of SIPPS

Matt Ward, wealth management consultant at Defaqto, assesses the threats and opportunities facing the SIPP world...

SIPPs are now 20 years old and during the past five years in particular they have attracted many column inches within the national and trade press. Surprisingly for the topic of pensions these have been largely positive stories in that SIPPs offer control, freedom and flexibility to the end consumer. However, as with all products and markets that become part of the mainstream consciousness, SIPPs now find themselves under scrutiny. In particular the suitability of SIPP recommendations for clients is being challenged and studied.

Challenges and opportunities

Despite the SIPP market enjoying unbridled success it now faces a number of challenges during 2010 and beyond that may impact on both IFAs and providers. However, where there are threats there are more than likely to be opportunities.

Threat – The findings from the FSA’s Thematic Review into the suitability of pension transfers to personal pensions and SIPPs may have a negative impact on the reputation of the SIPP market and on future pension transfer business levels. The likelihood of further fines for IFAs who have conducted unsuitable transfer business seems somewhat inevitable.

Opportunity – The regulator’s reminder to IFAs of their conduct around pension transfers has hopefully come early enough, and been strong enough, to prevent a large scale mis-selling scandal, although further punitive fines are expected. IFAs who have adopted well planned product suitability processes will not only stand to come through the review safely but will have a strong chance of becoming pension transfer specialists.

Threat – The FSA’s Retail Distribution Review (RDR) setting out the future advice roadmap in the UK may have an impact on the distribution of SIPP products and the remuneration structure of IFAs recommending SIPPs.

Opportunity – From both a product viability and a remuneration payment basis the structure of SIPPs means they are set fair for prosperity in the run-up to 2012 and beyond.

Threat – The credit crunch has meant consumers have less money for long term savings, which could have a negative impact on future pensions new business figures.

Opportunity – This lack of spare savings resource is highly likely to impact on regular premium pension business. A lack of annual bonuses may impact on the level of single premium business to SIPPs in the short term but the levels of pension consolidation, which have driven the growth of SIPPs, are likely to continue apace. Similarly a large proportion of the well-documented wave of maturing ‘Baby Boomer’ funds is likely to continue to find its way into the SIPP market for those clients wishing to use drawdown in retirement.

Threat – The volatility of the stock market may have made consumers nervous of investment based products, which could impact negatively on pensions new business figures.

Opportunity – The diversity of investments available through SIPPs has long been their key strength and if any financial product has the ability to provide access to a wide enough range of assets to deliver growth and protect capital for clients in difficult markets it will be SIPPs.

However, IFAs will need the expertise and/or professional relationships required to take advantage of these opportunities and see clients through difficult times.

Threat – The reduction to tax relief on contributions for high earners at the 2009 Budget, which could mean consumers affected by the change seek alternative solutions.

Opportunity – Pensions still represent one of the most tax efficient ways for clients to save for retirement and hence IFAs will continue to get plenty of opportunities to advise clients on the use of SIPPs for retirement saving, consolidation and income needs. Should high earners be put off utilising pensions by the changes made at the 2009 Budget there will be opportunities for IFAs who specialise in tax planning to seek supplementary or alternative solutions for clients.

Number of SIPP market players

The success and growth of the SIPP market has given rise to a new breed of pension providers and this market has bucked the trend witnessed in the personal pension market by seeing a year-on-year rise in the number of players featured within Defaqto’s research.

Overall SIPP marketing offices increased from 71 to 76 between autumn 2008 and autumn 2009. This market is made up of a variety of players and neatly exemplifies the way in which the individual pension market is moving.

While insurance companies – which have pretty much been the sole providers of personal pensions – feature in this market there is a place for specialist pension administrators, platform providers, banks and stockbrokers in this market. There is also a huge range in the size and profile of the companies, which operate in the SIPP space.

Defaqto believes the number of players in the SIPP market is unsustainable and likely to reduce over the next couple of years, especially if the challenges surrounding the valuation of SIPP business assets can be overcome.

Defaqto believes the following reasons will contribute to this contraction in the number of SIPP market players:

Competitive market forces – There is an unprecedented level of competition for assets under management (AUM) within the individual pensions market and wider wealth management market. The emphasis has changed from securing quantity to quality business. This competition traverses the traditional lines of engagement leading to cross-market rivalry among a range of companies. Some companies simply will not be able to continue to compete for business, especially if the battle for business comes down to price.

Financial strength – Specialist SIPP providers are likely to come under pressure from IFAs and larger mainstream providers to prove their financial strength and capital adequacy capability. A lack of comparative accreditation for the strength of SIPP players does not help their cause.

Interest rate levels – Some companies, which have based their business model largely around a return on the interest on SIPP cash balances, will struggle with rates at their current low level. As at 17 November 2009 the average gross interest rate payable on £100k held within a default SIPP bank account stood at 0.19%.

FSA regulation and Thematic Review – The full effects of the FSA’s regulation of the SIPP market and their subsequent reviews of transfers and SIPP operators have yet to be felt and further market impact will be experienced during 2010. Smaller providers are likely to come under pressure from the findings of the FSA’s review of SIPP operators and rising regulatory costs.

Merger and acquisition activity – Some existing companies will see this as a natural route to growing their market share. There is the potential for a consolidation player to emerge in the SIPP market. It may also become an appealing route to market for new entrants as opposed to building market share from scratch.

Wrap platforms – Although SIPPs are proving to be the pension component of choice on wrap platforms, as wrap platforms grow in popularity and product wrappers become more homogenous SIPP providers will feel the impact.

Systems requirements – The investment required to run IT systems for administration and to make steps forward with online functionality and servicing will be beyond some players.

Product design – At present there are two main approaches for providers marketing SIPP products to the IFA market, flexible (open market asset types and investment services) and structured (prescribed links to some asset types and investment services). IFAs are currently comfortable with both approaches, dependant upon the needs of the IFA and their client, but should one of these approaches ultimately prove to be the more successful, some providers may suffer as a result.

SIPP fees – Defaqto’s annual reviews of the SIPP market have reported year-on-year reductions on the average level of core SIPP fees – set-up and annual administration. Although providers can still seek to trim, or offer special offers on set up fees  when running new business campaigns, Defaqto does not believe there is much more room for manoeuvre with regards to annual administration fee levels.