The Sipps market has been through several years of expansion and continues to grow but will tighter regulation, tougher competition and squeezed margins take their toll?

The Sipp market has seen remarkable expansion in the past few years. It now hosts 74 Sipp providers of varying sizes offering at least 122 Sipps, according to independent financial services consultancy Defaqto.

While the consultancy’s figures show that the number of providers has remained static over the past year, there has been a 17 per cent increase in the number of products on offer, and on the product sales side, FSA first quarter data shows that between 2010 and 2011, total sales of Sipps produced year-on-year growth of 15 per cent, compared to a 10 per cent fall in personal pensions sales.

However, while the general consensus is that further growth potential may exist in terms of product offerings, there are issues coming to the fore in 2012 that may well act as the catalyst for consolidation among product providers, an event that has been predicted for a number of years.

Looking first at the opportunities. Both product providers and companies researching the market, such as Defaqto, believe the major growth segment for Sipps in 2012 and beyond will be the at-retirement market. This will be driven in large part by the demographics, as the ongoing waves of baby boomers reach retirement over coming years, many of whom will have accumulated significant pension funds, including defined benefit (DB) arrangements.

Stewart Dick, head of sales with Hornbuckle Mitchell, is a subscriber to this positive view of the market. He said: “The baby boomers coming into the retirement market, the legislative changes brought in by the Government in April 2011 around capped and, particularly, flexible drawdown, as well as areas such as scheme pension, are all definite opportunities for the Sipp market,” he said.

Andy Leggett, Insight Analyst - Wealth Management at Defaqto, agreed. He pointed in particular to the regulatory changes around drawdown, including flexible drawdown, as having worked to highlight the at-retirement benefits of Sipps.

While initial predictions around the size of the flexible drawdown market considered it very limited, that has changed with more recent thinking from experienced pensions minds such as AXA Wealth’s Mike Morrison. He has expressed the view that there are likely to be many more high earners able to achieve the minimum income requirement (MIR) of £20,000 by combining different sources of retirement income – such as DB scheme deferred benefits - with the state pension, which could make flexible drawdown a viable option for a far larger market.

Mr Leggett says that while it is difficult to determine the size of the Sipp drawdown market, the proportion of plans in drawdown is around one-fifth to one-quarter of the total number of plans. “Assuming a market size rounded to 800,000 plans and £100bn assets under administration (AUA), we can calculate a market of 160,000 to 200,000 drawdown plans, worth £20bn to £25bn. The AUA may be an underestimate as drawdown plans are typically much larger than those not in drawdown.”

He adds that while all providers offer access to capped drawdown, under 60 per cent of Sipp products currently permit flexible drawdown. “However, we believe the proportion offering flexible drawdown will continue to creep upwards...with propositions from both Sipp specialists and insurers,” he says.

Mr Dick believes that while at retirement is likely to be a significant factor in the growth of the Sipps market, what has and will always attract Financial Planners to the full Sipp is the discretion and flexibility the wrappers offer. This strength is emphasised, he added, in an environment where interest rates are low, annuity rates are in a 20-year decline, stock markets are volatile and major indices have risen only marginally over the past decade.

“Every part of the financial advice world has struggled in the past two to three years because of market conditions and economic forces. Finding a wrapper that can allow full use of investment options plus the freedom to take advantage of bespoke solutions and tax benefits is going to be increasingly appealing to both Financial Planners and their clients,” said Mr Dick.

However, with around 74 Sipp providers in the UK, even with a booming market some consolidation seems inevitable. Leading industry figures, including MoretoSipps founder John Moret, have redicted consolidation for several years. Despite feeling there are “good times ahead for the Sipp market” in general, Hornbuckle Mitchell’s Stewart Dick believes that, “on the flip side, there are some fragilities as well.”Christine Hallett, chief executive of Carey Pensions UK LLP, similarly believes it is the ability to bespoke different propositions for different needs that is keeping Sipps front of mind with Financial Planners. “In this respect, we are seeing growth in both our restricted and our full Sipp propositions,” she said. Ms Hallett also flagged corporate Sipp as an area of particular opportunity for business growth for Financial Planners. She said: “This is certainly an area we have seen picking up. Financial Planners are using a Sipp framework to set up a company pension scheme. They can offer different Sipp options and bring together best of breed administration and investment management, managed by the planner, which creates value for the client company for all levels of employees.”

He said: “There is a huge number of providers in the market but industry figures show that around 80 per cent of all Sipp business in the UK is conducted by the top 10 Sipp providers. For Financial Planners conducting due diligence and from a regulatory monitoring perspective that is a huge challenge. The result has to be consolidation of the marketplace.”

Some acquisition and growth focused activity has already been seen in the past year. Pointon York acquired two small Sipp providers in April 2011 and then entered takeover talks itself but eventually made the decision to remain independent. In May 2011 Curtis Banks bought Sipp operator Montpelier; while in the same month the Dublin-based IFG group (which had acquired James Hay in 2010) received two takeover bids for its proposition, although talks ended in September. In December 2011 IFG closed the James Hay Family Sipp to new business. Hornbuckle Mitchell was also reported in mid-2011 to be in talks on a 100 per cent takeover by LV= but likewise chose to remain independent and is now looking to venture capital sources for investment for growth.

Not surprisingly, critical mass is considered to be a major factor in determining which companies will survive what could be a tough year ahead for some Sipp providers in this highly competitive market.

John Moret is on record as saying he believes a Sipp provider needs around 2,000 Sipps on the books to make a viable business. Christine Hallett concurs in general, but says it depends on the structure of the company. Carey Pensions now has around 1,500 Sipps under administration, she says, “but we started in May 2009 from scratch with a completely blank sheet of paper, a lot of experience, some great technology and the backing of our group. We’re making a profit so maybe advances in the market have brought that number down.”

However, Ian Williams, CFP^CM, managing director of Financial Planning company Ridgeford Consultants, believes that smaller companies with under 1,500 Sipps under administration could “go to the wall”. His view is based on experience of running his own smaller pension trustee company. “I sold my trustee company because from market costs at the time I calculated you needed a portfolio of around 1,500 Sipps to cover your overheads and keep your prices competitive. As the business was a small one of solely bespoke Sipps I sold on the portfolio. The people I sold it to ran it for a while but eventually sold out themselves.”

Other pressures adding to possible consolidation will be the squeeze on margins arising from the competitive nature of the market and the low interest rates on cash accounts. Defaqto calculates that since 2006 the average set-up fee charged by Sipp providers has fallen by 27 per cent. At the same, a source of income for providers, interest sharing on cash accounts, has been hit by low interest rates. “For providers established in the higher charging, higher interest environment, these elements combined with rising fixed costs will put pressure on viability,” said Mr Leggett.

However, perhaps the most significant factor and the one that will be the catalyst for the first round of consolidation in the industry will be the imposition of new capital adequacy rules set by the FSA. Mr Leggett sees this as a major concern for Sipp providers. “Some have capital reserves equal to six weeks operating expenses, some 13 weeks, but the FSA could increase these figures markedly. No one knows at the moment. This gives Sipp providers two concerns, the first is meeting the capital adequacy and the second is the uncertainty around exactly what the FSA will decide and how long before the new rules are in place.”

The FSA consultation document on capital adequacy is expected early in 2012. Until then, all M&A activity may well be on hold.

Andrew Reeves, CFP^CM, director of The Investment Coach Limited, subscribes to the view that 2012 will see a flurry of exits from the Sipp market, driven in the main by two factors. The first is the ability of providers to differentiate their proposition from others. “I just can’t see how the smaller providers will be able to market their proposition to be noticed in what could be a reduced financial advice marketplace after RDR,” he said.

The second area will be service levels. “If the differentiation you are hanging your hat on is service,” Mr Reeves said, “then you need a good few years behind you to prove you can meet the standards Financial Planners want.” Mr Leggett agreed, flagging the need for Sipp providers to have not just the ability to deliver best of breed service but the technology that can meet the expectations of planners and their clients. With just 22 of the 74 Sipp providers having published service levels, it is the independent star ratings on providers, such as those from Defaqto, that can be invaluable tools here.

Another notable cost implication for Sipp providers is the increasing FSCS levy. This is a further burden on providers of all sizes and combined with increased regulatory costs, could also contribute to exits from the market. Mr Leggett believes a further significant factor in 2012 is the implications of the FSA’s platforms papers, notably around fees. Defaqto’s White Paper “What the Platforms Policy Paper means for Sipps”, pointed out that some Sipp providers supplement revenue generated from explicit administration fees with that from other sources – such as interest sharing on cash accounts. If, as Defaqto believes, this flies against the FSA’s RDR rules, providers may be prevented from receiving this income in future, hitting revenue and the viability of certain business models.

In 2012 the Sipp market will be fragmented and in flux. It is likely we will see changes brought about by regulation, market forces and business pressures that will affect the number of providers and what they offer. As Mr Leggett added: “Financial Planners must keep the Sipp market and Sipp providers under constant review.”