Surviving in the SIPP market

Retirement Planner talks to Martin Tilley about the potential increase in provider consolidation and what this means for the SIPP industry.

What are the major trends that you are seeing in the SIPP market right now?

As far as trends go, we are seeing an increase in the number of direct commercial property deals.

We estimate that about one in four of the SIPPs we have coming in have some kind of direct investment into property.

In these tough economic times, it can be difficult to get the ­necessary funding to do this and so, we are increasingly seeing properties ­being purchased on a joint basis. We even had a case of several advisers clubbing together to purchase their office.

The post-A-Day reduced ­borrowing facility hasn’t helped matters. This is a massive ­factor that gets in the way of many ­property ­purchases – this is why so many people have to purchase their properties jointly.

Other more esoteric assets are ­becoming popular again. It is the wider range of ­investment within a SIPP that allows diversification and thus potentially can reduce risk.

On the downside, along with other bespoke SIPP providers, we have lost some business out the back door as a result of people no longer requiring the full features of a SIPP, having disposed of the asset for which the SIPP was originally required.

The prospect of SIPP provider consolidation was first raised when SIPPs became regulated. But we are only seeing signs of it starting to happen now – why do you think it has taken so long?

I think it has taken a bit longer than we thought because a lot of the providers have been scrambling for a reduced amount of business.

They have been constrained by significant reduction in interest rates that have played a part in forcing down margins.

There is also increasing ­competition and this has forced SIPP providers to come up with fee agreements that are unsustainable.

For instance, we see SIPP providers offering free transfers – all of these things have a cost and providers should not be absorbing these costs into their businesses.

In addition to this, we have the spectre of increased capital ­adequacy requirements, as well as the FSCS levy, which has been a bit of a bombshell for many providers.

It is not just the smaller firms that will suffer. I think in future we are going to see larger firms who have higher administration costs starting to struggle and we could see  situations where these providers look to set up strategic partnerships to help them continue.

We are fortunate at Dentons in that we have an extremely strong balance sheet and potential clients are increasingly asking questions about the financial strength and longevity of providers.

For instance, we have just picked up two cases from an IFA where the client had asked them to find a SIPP provider who was strong and likely to remain in the market for the long term.

I think the turning point in the industry is coming as providers face up to these cost issues as well as those of service and sustainability.

The concern is that we could end up losing some good niche providers in this process.

People have often built a business off the back of their expertise in a particular area.

My worry is that this expertise could be lost and we will end up with larger bland ­offerings dominating the market.

How do you see the SIPP market evolving over the coming years?

I think while we won’t necessarily see a reduction in the market we will see more of a growth slowdown.

I think the main growth area will be in the middle market, which will be IFAs ­looking to outsource the investment ­decision liability to discretionary fund managers, if needed.

There will be less growth at the bespoke SIPP end of the market as much of this is tapped and there are limited new clients coming into the marketplace.

However, I think the SIPP market will continue to expand and strong companies who are able to adapt to the changing marketplace will survive and thrive.