Is large scale SIPP consolidation looming?

Helen Morrissey looks at whether recent reports mean large scale SIPP provider consolidation is on its way.

When SIPPs were regulated in 2007, it was widely believed provider consolidation would follow soon after. It was thought high costs associated with regulation would make trading difficult leading to acquisitions.

But four years on, we have yet to see consolidation happen on any meaningful scale. However, recent news prompted some to believe consolidation could be on its way.

Earlier this year Curtis Banks purchased the Montpelier SIPP portfolio and Pointon York made it clear it was setting funds aside to acquire smaller SIPP providers. Then in July, reports circulated that Hornbuckle Mitchell was looking to attract a partner willing to either make a significant investment or purchase the business outright.

However, while the Montpelier purchase and Pointon York news could well signify a move towards consolidation, the Hornbuckle Mitchell news is less clear cut.

Its director Mary Stewart says: "We would like a strategic partner to invest in us so we can accelerate growth and take it to the next level.
"That is the point we are starting from. We have had interest, but we need to choose the right partner to help us develop the brand."

Reasons for consolidation

So while there is certainly some degree of consolidation going on within the SIPP industry, spokespeople are divided as to whether it will become a large scale trend. AJ Bell's sales and marketing director Billy Mackay is one such sceptic.

"I'm not convinced that it's going to happen," he says. "The firms purchased so far have been small firms, often purchased by other small firms. I don't believe there have been any large scale consolidation exercises."

Mackay also believes that acquisitions such as Legal & General's purchase of Suffolk Life in 2008 was not so much consolidation, rather a case of providers with no current exposure to the SIPP market using acquisition as a means of getting involved.

While some may remain sceptical about whether consolidation is going to happen, there are many who believe it is a certainty.

MoretoSIPPs founder John Moret was the first to talk about potential consolidation in 2007 and he continues to hold firm to his view.
"I think consolidation has already started," he says. "We have 80 to 100 small providers in the market trying to make a living administering a small number of SIPPs. They are coming under a great deal of scrutiny from the FSA."

Stewart agrees saying difficult trading conditions could prove too much to bear for many smaller providers and says consolidation is "inevitable."

She says: "Margins are becoming more squeezed and we think smaller players will struggle going forward. We think capital adequacy requirements could increase to 12, or even 13, weeks. While we already operate at this level, it will place significantly more pressure on those who don't.
"Also, the FSCS levy is not going to go away. It is a cost of doing business and providers need to decide how they are going to handle it."

In addition, the SIPP market is developing quickly and providers need to keep pace with this rate of change - and this costs money. According to Stewart, Hornbuckle will soon implement a new pensions administration system."The system will make our processes more efficient as clients expect a lot more IT functionality from their SIPPs today.

"The greater efficiency brought about by these changes will enable us to spend more time doing what we pride ourselves on - providing high levels of service."

Why hasn't consolidation happened yet?

So if consolidation is indeed inevitable, why hasn't it happened yet? Suffolk Life's head of marketing Greg Kingston believes there are several factors at play.

"The timing of it all shows how long the regulator has taken to get to grips with the SIPP market. We have seen record low interest rates that have killed off revenue as well as the FSCS levy."

So, what impact would SIPP consolidation have on advisers and their clients? According to Nick Platt, director at Henwood Court Financial Planning, clients could miss out on much needed choice.

"We find that the smaller independent providers have more discretion and flexibility - they tend to adopt a more common sense approach," he says.
"In the case of commercial property purchase such providers enable you to appoint your own solicitor and manage the property yourself. Many of the big insurance type SIPPs will ask you to use their solicitors and letting agents and that costs money.

"If we see consolidation happen, then there will be less providers and so less choice."

So, while the current slew of activity may not yet herald the beginning of SIPP consolidation, it would seem it is only a matter of time. While such consolidation will ensure only the strongest providers survive, it must not be at the cost of the service provided to clients.

EDITOR'S NOTE - In the printed version of the article (RP September 2011 page 19) we incorrectly stated Hornbuckle Mitchell was looking for investment to fund a pensions administration system. The investment is in fact needed to fund the future growth of the company rather than current projects.