Stimulating challenges

Ray Chinn, John Moret and Richard Mattison take a look at how the SIPP market is dealing with the current challenges and asks how it will develop going forward

What lessons did you take from last year's thematic review of pension transfers? Were you shocked by some of the review's findings?

Chinn: Although the fact that the FSA still found some bad practices in terms of pension transfers, I wouldn't say that the findings were a shock. Everyone is aware that pension transfers - particularly to flexible contracts such as SIPPs are complex. The lessons we can all take from the findings are to ensure that the advice provided looks not only at the customers' current needs but also how potential changes in circumstances may 'test' the advice in the future. Having strong documentation as part of the audit trail is also essential - and by this I do not just mean having a copy of relevant documentation - but also having the 'story' that brings together the various documents and explains exactly why the decision to transfer (or not) was made.

Mattison: Most of the findings came as no surprise at all, and there are two main reasons for this. Firstly, it is thought that at least one household name has offered IFAs enhanced commissions for switching their clients from their old personal pension or stakeholder arrangements into their higher charged SIPP contract, and as the FSA pointed out, in most cases this did not result in any noticeable increased uptake of the investment flexibility available within the SIPP.

Secondly however, the FSA's findings appear to be a symptom of the failure of their philosophy of a principle based regulatory regime. On the one hand they have stimulated a move to principle based regulations, allowing advisers to determine how they should approach the advice process, and then when they have seen the results they have decided they don't like what they see as it has not been carried out in the way they wanted. The regulatory regime should be clear, fair and not misleading, so all regulated firms, advisers and providers alike know exactly what is expected of them and can carry out their day to day business in no doubt that they are meeting the FSA's expectations. Principle based regulation has not therefore been a success and it is time for a rethink.

Moret: The findings of the FSA thematic review were not really a surprise. After all, the review covered a relatively small part of the SIPP market, with a weighting towards the propositions offered by the traditional big insurers. In light of this, the fact that five cases out of every six passed without issue is welcome. What is clear is that the issue of suitability is key - certainly for the regulator. Its focus on cost is perhaps questionable particularly at the bespoke end of the market - but there is undoubtedly more that providers could do to increase clarity and understanding both of their charges and the costs of administering SIPPs properly.

What does this mean for the SIPP market?

Chinn: The pensions transfer review should have a positive impact on the SIPP market. There had been concerns that moving customers into SIPPs from existing pensions contracts would be too tempting for some resulting in poor advice. The thematic review showed that wholesale malpractice is not prevalent in the market. The guidance provided in the review, plus the fact that the FSA has provided additional material since the review was published - including regional seminars and other documentation to support IFAs - should mean that the market can avoid any significant mis-selling claims going forward. What the review did highlight, which I think is very relevant when looking at SIPPs in particular, is the need to ensure that the underlying investment choices are not only appropriate but also fully understood by the adviser. This means having a more detailed view of exactly what is underpinning the selected funds or investments. Given the wide range of choices in the retail OEIC market alone, without considering some of the other options - including structured products and more esoteric investments, this is no small challenge. This may be one of the reasons why we are experiencing more IFAs utilising packaged products (e.g. funds specifically matched to a given risk profile) or fully outsourcing the investment choices utilising the services of an discretionary manager (DM). Since launching our packaged DM service just over five years ago we have seen almost 50% of new business flows going down this route.

Mattison: Over the 21 years I have worked in the financial services industry, the two phrases I have heard more than any other (including "the value of your investment can go down as well as up") are: "closing the stable door after the horse has bolted", and "using a sledgehammer to crack a nut". It is with great regret therefore that I feel the result of the FSA's thematic review will once again invoke these two, or even a combination of both, phrases. As far as SIPPs are concerned, the likely impact is that those IFAs who were switching clients from insurance company personal pensions to platform based SIPP providers are going to have to work harder to justify their reasons for doing so. There are often many good reasons for recommending such a switch, but reason-why reports will have to be more detailed and address all the issues raised by the FSA. This could lead to a reduction in new business flows to these companies. The full SIPP providers who tend to specialise in offering the genuine SIPP with access to all investment opportunities permitted by HMRC will probably be unaffected, as a transfer to these firms is usually recommended to access asset classes which are unavailable from an insurance company plan, and have been identified as a specific need or are particularly suitable from the fact find process.

Moret: In pure terms of the review, there is probably some polarisation which will mostly be centred around commission. Given that the SIPP market still relies heavily on transfer business (we estimate over 75%), those advisers and providers that maintain a business model based on commission-earning transfers will have the most to consider. Advisers and providers already well attuned to fee-based transactions will be in better shape. SIPP providers have to play their part though, and offering proper illustrations for new business is only the first step.

When SIPP regulation came into effect many people predicted wide scale consolidation among providers. Are you seeing much evidence of this?

Chinn: There has been some evidence of consolidation, but probably not as much as originally anticipated. Some of the elements of regulation were (and remain) onerous for SIPP providers. The need to be able to rely on a strong administration platform, utilising technology wherever possible to ensure a cost effective delivery is vital. The post A-Day SIPP 'bubble' plus the impact of the more recent changes to allow protected rights benefits the ability to self invest has helped to keep the market buoyant and has probably helped some SIPP providers continue to grow. Over recent months the challenges facing SIPP providers have grown. Recent market volatility has knocked investors' confidence and meant that there has been a slowdown in growth. Perhaps the most significant threat now facing some providers is the pressure on margins caused by the reduction in interest rates. Many SIPP providers have become reliant on the differential in what they can earn vs the rate they pass on to customers to help to supplement their income flows. With the Bank of England base rate now at 0.5%, this has squeezed some providers' margins significantly. Only time will tell what this will mean for the market, but there is potential for further consolidation resulting from this. Added to this is increased competition - particularly in the at/post retirement space - from life office propositions and also the platforms and wrap providers - which again may see some of the niche providers under pressure looking forward.

Mattison: Thus far, there has been no real proof of the predicted consolidation in the SIPP market. This is not to say that it won't happen, just that it is still too soon. When an industry is put under pressure as is happening to the SIPP market, the businesses that comprise that industry are usually able to withstand the squeeze for quite some time before they finally crack. A number of measures are taken before the consolidation process begins. For example, a common first step is to go on the offensive with increased marketing and advertising, so fees can be increased, and then cost cutting measures taken, such as slashing staff numbers and moving to a low cost location. There is much evidence of this in the last year to eighteen months in the industry. The next phase will see uncompetitive firms bowing to the inevitable pressure and consolidating. It is likely that the SIPP industry will look quite different in eighteen months' time. In the meantime, it is important for any advisers who are looking at suitable SIPP companies for their clients to take into account the financial stability of the provider.

Moret: The SIPP market is changing post A-Day but for some it is perhaps surprising that it hasn't happened as quickly as they thought. With some well publicised cases of service failures in recent months though, it is clear that the impact of regulation is now upon us, especially for many of the smaller providers. More pertinent perhaps is the current economic climate - record low interest rates have lead to greatly reduced revenues among some providers, yet those same conditions have meant that the financial appetite of the larger players to take advantage of some struggling providers may not be there.

What do you think the future holds for the SIPP market? What do you see as being the key challenges it will face?

Chinn: The key challenge is, to me, relatively straightforward - to continue to provide relevant and effective propositions to meet customer needs. Whether this is simple, limited choice products at the accumulation stage in the mass market space or more bespoke offerings in the high net worth (HNW) market moving into retirement. There is also a good opportunity to link these propositions in with other products - such as ISAs - to provide a more holistic approach to planning as being pioneered in the wrap market. If providers and advisers can deliver accessible propositions to the market that offer good value then the SIPP market will continue to grow strongly. Despite the earlier comments on potential consolidation, I believe that competition and differentiation will continue - which is again a good thing in providing choice to customers. With technology helping customers to understand more easily how their SIPP is performing and how this will impact on their retirement plans the increased transparency in the market will help to improve trust and consumer confidence. The current market turmoil has helped demonstrate the importance of being able to be flexible in terms of investment strategies - which plays strongly into the SIPP market. The arrival of personal accounts will also increase focus on pension planning and may help drive further growth in the SIPP market, possibly through Group SIPP arrangements.

Mattison: There are three main challenges facing the SIPP market, although as SIPPs are now mainstream forms of personal pensions, these can be seen as challenges for private pension provision in general. The first is the issue of rates of interest paid on cash deposits. Like fund managers, stockbrokers and solicitors, SIPP providers handle large sums of cash on behalf of their clients. Each SIPP starts with a cash account, and even if this acts only as a through-flow account for money to pass through, when the total balance for all clients of a provider is added-up, the total can amount to tens of millions (even billions) of pounds on any single day. The underlying SIPP client receives interest on these accounts which varies from one provider to the next and in almost all cases the provider takes a cut of the interest for itself. The percentage of a provider's total income which is derived from bank interest therefore differs, but studies from a couple of years ago revealed that as much as 40% of a provider's income can derive from deposit interest. A near zero interest rate environment means that this income stream has virtually dried up, affecting the provider's bottom line, accelerating the process of consolidation described earlier. This is a real business threat to some providers.

The second and third challenges involve those of regulation. The FSA is now getting to grips with the SIPP industry, but there still seems to be a lack of understanding of the term "member directed" when applied to SIPPs. Providing 200 illustrations a year to each SIPP client to help them understand what they might receive as retirement benefits if all the assumptions used come true is not a practical measure to achieve the FSA's six desired outcomes, and the industry needs to collectively address the tide of regulation to try and enable SIPPs to operate in a way the public wants them to rather than the bureaucrats.

Similarly, HMRC regulation needs some practical re-examination in areas such as death after age 75, and transfers of property SIPPs with pre A-Day borrowing, to stimulate interest in retirement savings. At present, the so-called pension simplification regulations have not been successful enough to help ease the savings gap, and there is still too much interest in rule bending and moving funds to offshore tax havens.

I do not consider the forthcoming introduction of Personal Accounts in 2012 as a challenge, but rather an opportunity, as anyone would be mad to try and engage with such a daft idea and the private sector workforce of the UK will be looking around for alternatives over the next three years.

Moret: The outlook for the SIPP market remains bright but for some there are some great challenges ahead and not all may be able to meet them. The loss of income in an ultra-low interest rate environment poses problems that smaller providers may not be able to overcome while for others the challenge may well be how willing they are to invest in and capitalise upon technology to support both advisers and clients alike. SIPP popularity is likely to continue with the likely accelerating demise of defined benefit schemes and providers will have to ensure that they are financially and technologically able to effectively scale to meet the continued demand without a drop off in service levels which have played a key factor in the growth of the market to date.

What impact are protected rights having on the SIPP market?

Chinn: Protected rights has driven significant growth in the SIPP market over recent months - at a time when investment returns have been falling. This activity has helped to sustain strong trading figures for many SIPP providers. Although some of the complexities surrounding protected rights will not disappear completely until 2012, the ability to put all pension 'pots' into a single plan does simplify things from a customer perspective - again improving the attractiveness of a SIPP style proposition for many. In reality is it likely that the majority of protected rights monies that was likely to switch to a SIPP has now done so, but this opportunity has helped to secure SIPPs as a mainstream pension product rather than a niche offering for HNW customers only.

Mattison: The predicted impact of protected rights on the SIPP market may have been over-cooked somewhat and coupled with the severe market downturn that coincided with the regulatory change, has led to this being something of a damp squib. However, the issue has not gone away and is more likely to be a slow burner. Once again, the FSA's transfer review may temper the flow of protected rights transfers where it is hard to justify these on grounds of increased costs within a SIPP.

Moret: The immediate impact of protected rights within SIPPs is to open up a whole new area of transfer business that was previously blocked, but with many providers only having a few months under their belt for handling protected rights the real impact is yet to be felt. Recent service failures, when only considering non-protected rights, must raise concerns about the ability of some providers' to effectively administrate protected and non-protected rights together. Given that the full effects of SIPP regulation are only now starting to be felt after two or three years, advisers must be concerned that some administrators' ability to handle protected rights is not yet proven and problems may only rear their heads in 2010 and beyond. A good SIPP provider offers simple solutions to these complex issues, and advisers will gravitate towards those providers with a proven history of service excellence rather than risk their clients' valuable retirement funds elsewhere.

PROVIDER BIOGS

Richard Mattison is business development director at The IPS Partnership

Richard Mattison became business development director of The IPS Partnership in September 2008 following the merger of IPS Pensions and The PAL Partnership, the specialist SIPP, SSAS and employee benefits providers.

In 1993, Richard joined PAL as an account administrator, moving on to account executive, then business development manager before his appointment as director.

Richard's roles include sales, marketing and product development of The IPS SIPP and SSAS products.

About The IPS Partnership

The IPS Partnership was formed by the merger of the two SIPP and SSAS providers owned by the IFG Group Plc, IPS Actuarial Services of Bristol and The PAL Partnership of London and Manchester.

The IPS Partnership has over 7,000 SIPPs under management, placing the firm comfortably in the top ten league table of SIPP providers in the UK.

The IPS SIPP, a full SIPP, allows the whole range of investments permitted by the HMRC and continues to receive ongoing protected rights payments until 2012.

John Moret is director of sales and marketing at Suffolk Life

John is often referred to as "Mr SIPP" having been involved with SIPPs since their conception in 1989. He has been a passionate advocate of the advantages of SIPPs and was the inaugural chairman of the SIPP Provider Group - now known as AMPS.

He has spent a large part of his career enjoyably working in the intermediary market on behalf of a number of pension providers. He spent four and half years as CEO and then executive chairman of PPML, the first company to launch a SIPP in the UK before it was sold to Capita in 2004. He then joined Suffolk Life, one of the leading providers of SIPPs, with the aim of growing the company's business. The company was sold to Legal and General in 2008.

He is a frequent contributor to a wide range of pensions journals and other trade magazines and is a regular chair and speaker at industry conferences and seminars and has worked with Government and regulators on a range of pension issues - including the introduction of income drawdown in 1995. In the future he hopes to see some evidence that 'pensions simplification' - which he strongly supported - has really worked and hopes that eventually we will reach a point where the responsibility for the design of the pensions landscape does not lie with Government.

About Suffolk Life

Suffolk Life is one of the UK's leading providers and administrators of self invested personal pensions (SIPPs), having established over 14,000 self-invested plans with gross assets exceeding £3 billion.

The Suffolk Life MasterSIPP has offered genuine self-investment of protected rights and exceptional investment flexibility for non-protected rights as part of the same scheme since October 2007.

Numerous industry awards and accolades have lead Suffolk Life to become synonymous with service excellence and technical expertise. It recognises the value in supporting and fostering long-term relationships with advisers and planners, and by delivering the personal touch. It is committed to maintaining the highest of service standards and to being the intelligent choice for SIPPs.

Ray Chinn is head of pensions at LV=

Ray has spent over 20 years in the financial services industry, in a variety of marketing, product development and strategy roles. In his current role Ray is responsible for the development of the pensions proposition - which primarily focuses on the at and post retirement market.

About LV=

The LV= Flexible Retirement Solutions business, part of the LV= group, launched in January 2008 and offers a range of capital and income retirement planning products. LV= serves more than 2.5 million customers and members, and manages around £8 billion on their behalf.