What impact the ongoing shake-up of the SIPP market?
What impact is ongoing change having on the SIPP market and how might it affect advisers’ due diligence and use of SIPPs? Mark Canning, head of proposition and development @SIPP, takes view of the market
Increased consolidation, heightened provider scrutiny (due to the new capital adequacy regulations), and ‘failed’ investments have all kept Self Invested Personal Pensions (SIPPs) in the headlines recently.
A quick glance at the scale of the market highlights why there is such an interest in all things SIPP. Since inception over 25 years ago, the market has reached 1.4M SIPPs with a value of £176bn1.
By any measure it’s a sizeable market, but what do the new rules and the on-going change mean for the SIPP world?
Scale versus flexibility
It is ironic that factors such as flexibility and choice, which fuelled market growth, now face attack as a result of increased consolidation.
Whilst the regulator may long for a smaller market with a few large scale providers, is this really in the best interests of clients? After all, today’s inflexible market where clients are often steered towards investment providers via panels, or restricted to ‘on platform’ options, is markedly different from the market of the 1980s.
Advisers, I believe, will revisit their approach to provider segmentation. For example, many providers in the bespoke SIPP space now offer cost effective, fixed price wrappers with significant cost savings versus their platform counterparts. These typically also offer a ‘futureproof’ gateway to wider investment choice – including off-platform options such as bespoke DFM offerings and commercial property.
The pace of consolidation has perhaps been slower than many might have anticipated pre regulatory change in September. But, as that time is now upon us, there is no hiding place for businesses unable or unwilling to meet the new capital requirements.
As the shake up continues, the old adage of ‘buyer beware’ has never been more appropriate. For example, what exposure does the target provider have to ‘toxic’ assets such as Harlequin? How easy will it be to integrate these new businesses into the parent company? How long will said integration take? And what will the knock on effect be on its ‘core’ business?
Full fat or semi-skimmed?
As providers consider their wider proposition in the new world, I believe we will increasingly see a polarised market of ‘full’ versus ‘deferred/platform’ SIPPs.
With a phenomenal 80 SME firms being created per hour in 20162, pension led business funding has never been more in demand. Full SIPP players supporting such options can help provide the catalyst to help those new businesses grow in their early years.
Equally, clients who wish to hold multiple tax wrappers, will benefit from the sharper technology and cash flow modelling tools traditionally only found in the platform space.
Looking beyond the product offering, I sense providers (old and new) will place added value on the number of strategic partnerships they can develop.
Will those life offices and investment businesses that once held core self-invested books, now consider a different path? Outsourcing of administration functions, perhaps?
Investment businesses offering solutions now regarded as ‘non-standard’ may find distribution challenging as appetite for this wanes. Might this be the time to expand the business to become an operator and ultimately take control of distribution in-house? Perhaps an enabler of such an approach could be a partnership for administration support?
We have also witnessed a sea change in the Qualifying Recognised Overseas Pension Scheme (QROPS) market. Firms such as Momentum have expanded to include a UK-based SIPP offering with the advent of more favourable pension freedom options for their clients. Other firms may require a UK-based operator to help deliver such an option.
Compare the market
With more changes afoot, those involved in provider selection exercises will appreciate that undertaking a ‘like for like’ comparison can be a science in itself.
A simple yet effective solution is to draft a few scenarios and ask providers to confirm their charging approach for them. These examples of charging schedules should then be examined in the context of a typical client. Factors such as the level of ‘transfer in’ charges, transaction fees and costs to exit are likely to be key considerations here.
Finally, I predict an increased trend among providers to begin working with rating agencies. Ultimately, this will add depth and independence to the due diligence information they supply in the future.
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