A perfect storm is brewing in the Self Invested Pensions market. As the 'fleet' of 123 or so providers charts its course across the post-RDR seas - with the damning thematic review from late 2012 still ringing in its ears that accused many of regulatory deficiencies - they are being forced to negotiate their way through further heavy waters with more rule changes, the introduction of key illustrations and disclosure and the biggest threat of all - increased capital adequacy requirements - which could lead to some foundering on the rocks.
On the plus side, the prospect raised in this spring's Budget that residential property converted from empty commercial space may be an allowable investment in future, has offered some cheer for Sipp providers.
Matt Ward, wealth management consultant of Defaqto, which has just published its latest guide to help Financial Planners ask the right questions when choosing their Sipp providers, says of all the challenges, RDR was possibly the least daunting. He said: "The Sipp market is slightly different in that the specialist providers weren't encumbered with charges, as they have always been fee-based. Insurance companies had to change but not a lot of others. They are less impacted and are well positioned to work with wealth managers."
To some extent though the RDR effect created a backlog of demand by planners, according to Martin Tilley, director of technical services at provider Dentons. He said: "They were busily dotting the 'i's and crossing the 't's so doing less business. I'm not sure it was holding back a flood but we have just had the best February we have ever had."
In the view of Mr Ward, Mr Tilley and others, the stand out challenge ahead for providers is the planned changes to capital adequacy, when providers will have to increase their reserves from £5,000 to £20,000 - or more if they have 'non- standard' investments such as commercial property.
Mr Ward said: "We at Defaqto have predicted consolidation for a while. There is a suggestion that this could be what will finally give merit to that activity. Some providers will think it's not a market we want to be in as it's too expensive. Those whose Sipp businesses are not core might consider selling the business." The implications for Financial Planners are that they will need to ask more questions about the providers' backgrounds and how they plan to deal with the capital adequacy changes. He said: "They need to ask them about their approach and what they have got on their books, about standard and non-standard investments and get a feel for them. They need to be on the front foot."
The type of acquisitions activity may not be clear cut either. Mr Ward said: "Often you'll get a provider who buys just part of another business just as Suffolk Life did recently with Pointon York, just choosing a segment of customers." Other recent moves include Curtis Banks buying the full Sipp business of Alliance Trust, leaving Alliance with the platform business. He added: "They need to be aware of the things that could impact their choice."
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What seems clear is that the despite the challenges, the Sipp market is generally in robust health and growing. Sipp consultant John Moret at MoretoSipps, has predicted that there will be 1.5 million Sipps by January 2018, compared to just over one million today, with £122 billion of assets under administration.
Mr Tilley added: "The largest growth is on the platform side with less growth in bespoke but we are in both categories so don't mind."
Mr Ward added: "The Sipp market has become a mainstream market in the last 8 to 10 years. Most activity is in the mid market personal pension plans with links to platforms and Discretionary Fund Managers (DFMs). More advisers are outsourcing their investment services and a Sipp is helpful for those adept at working with DFMs."
A potential fillip for the Sipp market as a whole could come with residential property becoming a permitted investment. Robert Graves, head of pensions technical services at Rowanmoor, says the Budget hints that residential property could be back on the agenda was the surprising and welcome news hidden in the small print. He explained: "You can have residential property in your Sipp even now but there is a high tax penalty for doing so. But this development makes it look as it may be a permissible investment if it's empty commercial property being converted to residential use. Back in 2006 talk of residential property being allowed in pensions stimulated a lot of interest in pensions because people felt comfortable with bricks and mortar as an investment.
"It could stimulate the market this time too. It will take a couple of years before anything happens and they will need to resolve issues such as the investor not being allowed to derive any additional benefit from having their property in a pension. Advisers might be wary also because property is not a regulated investment."
Meanwhile capital adequacy changes are the hottest issue, linked to the current proposals to class commercial property as a non-standard investment - which could have implications for residential too. Mr Graves said: "If it does and residential is treated the same we would welcome that as we are bespoke Sipp providers and property is one of our bread and butter services. It's not the case for every Sipp provider though and those struggling with capital adequacy will see it as a no-go area."
Taking up serious energy is the debate over whether assets under administration should be used as the base formula for capital adequacy. Members of the Association of Member Directed Pension schemes, which represents the leading Sipp providers, argues strongly that the calculations should be based on the number of Sipps held by a provider instead. They are also pushing for the minimum capital requirement to be higher at £50,000.
With the future looking uncertain for some players in light of these and other changes, providers are responding to the needs of Financial Planners by helping to make their lives easier with their due diligence. Claire Trott, pensions technical manager at Suffolk Life, said: "We provide a full due diligence document that sets everything out on 20 pages everything about us from our systems and controls, our board, the structure of the company and so on. What we can show is that with the backing of our owners Legal and General, we will be around for a very long time. It's not just about the money either. We monitor and control what is in a Sipp from the DFM, platforms and anything that they buy and we won't allow anything that doesn't fit in with the allowable investments. We do check whereas some providers do not monitor in this way."
She believes it is a concern for planners and advisers that they could bet on the wrong Sipp provider that then exits the market. Ms Trott said: "They could lose face with their clients."
Chris Smeaton of James Hay, which has 6,500 commercial properties under management in its Sipps, is sanguine about the challenges ahead. He said: "Change in the Sipp market is a constant. Every year there is regulatory change, allowances change, rules change, no more greater felt than in the last few years." The provider is used to it and had everything in place before January relating to flexible adviser charging, for example. Mr Smeaton said his firm treated RDR as an opportunity and in preparation launched its Modular iSipp that allows client customers to have a core Sipp and then add on modules as they wish, such as commercial property or a whole of market option not offered in the core plan.
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Other challenges currently weighing on providers include the compulsory provision of key features illustrations from April 2013 so clients can see the effect of charges and reduction in yield plus inflation-adjusted additions from April 2014. Some observers believe the extra burden could push some smaller operators over the edge. Mr Smeaton said: "That's a massive leap in functionality for some providers that have never had to do it before. We have an online system and product illustrations as a matter of course although we will still have had to upgrade it. We have the ability to draw on a large team to test the IT, but for smaller companies it will be a bigger cost. For some
providers we are running into a perfect storm." The new rules are certainly concerning some providers. Andy Bowsher, director of Sipps at Xafinity, said: "While we view transparency as fundamental to building long-term consumer trust in the industry and have always taken an open position on disclosure, we are concerned that the new Sipp illustration rules will be counter-productive. Requiring the Sipp provider to project using the specific charges relating to each investment held within a Sipp wrapper is not workable in practice, particularly where the Sipp provider offers whole of market investment, as Xafinity does. We need clarity of the use of the FSA's 'reasonable assumptions' on charges and we are in dialogue with the FSA about the exact circumstance when such assumptions might be made. We will of course work with the FSA on this but still believe a wrapper-cost-only illustration provides a much clearer comparative for the client when looking at Sipp products."
Other challenges to the market are unpredictable, such being swept up in scandals surrounding risky investments, such as the experience of the Harlequin property investment debacle, although Mr Smeaton believes this is small beer for the market. Mr Smeaton explained: "We'll always get individual cases where some people have exposure to investments that have gone bad. That is more of a (planners') issue. They must do their research. Providers will have to have more stringent vetting procedures and weed out the less desirable options."
As for the Sipp market as a whole Mr Smeaton forecasts a "shift towards quality with advisers beginning to understand these challenges facing providers and align themselves with the successful businesses which are likely to be here in five to 10 years." Denton's Mr Tilley says his firm has been working on making its commercial property proposition as RDR-friendly as possible by not tying in clients to certain solicitors or surveyors. He said: "This appeals to Financial Planners as they will have relationships with professionals to whom they could introduce new business - and in turn offer them better networking opportunities." Mr Tilley said that its approach has helped give the company record performance in property with about 40 per cent of plans taken out this year so far investing in property, double last year's figure.
Dentons has also enhanced its offering relatively recently by introducing an online tool for clients who want to see valuations and is increasingly strict about what investments are allowed. He said: "We turn down more than meets the eye. We made a policy we wouldn't accept such things as off-plan overseas hotels rooms and we also said no to 'cloud lending'."
He agrees that the toughest hurdle for many is the looming capital adequacy changes: "It is the biggest thing that's happened since 2006-2007 when Sipps first became regulated."
Lisa Webster of Hornbuckle Mitchell is relaxed about all these challenges. She says RDR had a small impact because "we never paid commission" and on capital adequacy "we already meet the proposed requirements".
Ms Webster says she is confident about future business and is also seeing increased activity in commercial property, particularly in part-purchase. She said: "This is mainly by owners wanting to release money for their businesses as they are struggling to get money out of the banks. We have a property fast track service that can get these arrangements through in four weeks."
Billy Mackay, marketing director of AJ Bell, says providing investment content for planners and individuals has been an important part of its post-RDR strategy as the company works on differentiating its offering. He said: "We bought MSM Media earlier this year, which includes Shares magazine. Advisers find it's convenient to have all that information in one place." He believes the bespoke market may be slowing but expects their low-cost end of the market to thrive. Mr Mackay said: "The average adviser wants collectives and ETFs so they go for the low-cost option. He is unconcerned about the new disclosure regime. We have always provided access to illustrations. We are ready."

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