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SIPP capital adequacy: More questions need to be asked

Capital adequacy should be the lowest bar that needs to be hurdled by SIPP providers, argues Martin Tilley, director of Technical Services, Dentons Pension Management

A great deal has been written about the pressures on SIPP providers and their need to meet the new capital adequacy regime, which comes into effect on 1 September this year. However, much, if not all of this has focused simply on whether or not a SIPP provider will or will not meet their benchmark minimum requirements.

The new regime, for most, will result in a significant increase in the capital reserves required to cover the costs of an orderly wind up of the business, should this be necessary.

But more importantly the benchmark must be met simply to enable the SIPP provider to continue to operate at all. The Regulator has made it clear that it will crack down on those who are unable to meet the benchmarks and reporting on this by providers will be required on a quarterly basis.

The Regulator has also cracked down on SIPP providers in other areas, such as asset acceptance and the monitoring of where business comes from, where the thematic reviews have demonstrated that this had been severely lacking. Couple this with the increased reporting requirements, the potential reduction or loss of interest rate trail and the message for advisers is clear – financial stability has to be the focus.

Recent surveys by industry publications have focussed on which SIPP providers will meet the new benchmarks and almost without exception responding SIPP providers are reporting that they will.

Notably some providers are not responding to these surveys and whether or not they have something to hide remains to be seen. Some providers have already been snapped up in consolidation and several others are reportedly still on the market.

Thin scrutiny

The good news is that the message appears to be getting through to intermediaries and more questions about capital adequacy are now being asked, but crucially the scrutiny is often too thin.

Asking if the SIPP provider expects to meet its new benchmark by September is woefully inadequate. It is also an opinion and the Regulator, of course, likes decisions to be based upon factual information and due diligence.

Meeting the benchmark is in any event simply an indication that the provider will still be able to continue to operate its business from that date. SIPPs are long term savings vehicles which can often span decades and if the provider is to operate a client’s SIPP they must be in business over its expected future lifetime as the cost, time, inconvenience and sometimes embarrassment of having to move a SIPP, particularly one holding multiple individual assets, is not in anyone’s interest.

More in depth analysis by supplementary questions is therefore required if a clients’ SIPP funds are to be safeguarded and for its administration to be run both smoothly and efficiently.

Source of detailed information

There are, according to industry commentators, still in excess of 80 SIPP providers registered and even taking aside those that operate collective platforms only and therefore whose capital adequacy is not so adversely affected by non standard assets, there are still around 40 operating in the full or bespoke market.

While some SIPP providers have produced documents clarifying their own financial status and ability to meet the new benchmarks, an intermediary seeking to undertake at least even the basic fundamentals of financial analysis will have to expend considerable time and resources collating information on the SIPP provider market. There has not previously been a single source of detailed reference pulling together a number of SIPP providers’ financial details for comparison and analysis until now.

Released earlier this month by research consultancy Finalytiq, their report titled “SIPP Financial Stability Guide” collates in a single document a number of key financial metrics including assets under administration, turnover, profits, and staff numbers. The report covers the previous five years and, therefore, is able to identify trends as well as drawing conclusions and allocating a financial stability rating.

The SIPP industry in general has acknowledged the need for a centralised data report which should be of value to any intermediary looking to recommend a SIPP partner for their long term clients. It has, however, been welcomed more by those providers who have fared better and criticised by those who have not, but the factual information it contains speaks for itself.

It should be remembered that simply holding the Regulator’s minimum capital adequacy benchmark is the lowest bar needing to be hurdled. These assets must be retained and cannot be dipped into for other operating purposes. A successful, stable, growing and forward looking company will need significantly more capital for projects and investments into areas such as IT development, staff training and resourcing, marketing and not least compliance.

It is the companies that have planned and hold capital well in excess of the Regulator’s minimum reserves that will be able to do this and who will have a better chance of operating in the marketplace well beyond the new benchmark introduction date.

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