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Cash crunch

Low interest rates mean providers cannot make the same margins on cash held in Sipp accounts, reports Lee Jones

Last week, the Centre for Economic and Business Research predicted that the 0.5 per cent base rate will continue until 2011 and could be below 2 per cent for the next five years.

If this prediction turns out to be true, it could have a huge impact on Sipp providers, many of which generate revenue from interest paid on cash deposits held within Sipps.

Where once a provider could take as much as 4 percentage points out of an account paying 5 per cent a year, they are now fortunate if they can make 0.5 per cent from the money held in their members’ accounts.

IPS Partnership business development director Richard Mattison says a reduction of 3 or 4 per cent on thousands of accounts will undoubtedly have a serious effect on the profitability of Sipp providers.

He says: “That is tens of millions of pounds lost, the difference in income is enormous. Some people have estimated that as much as 40 per cent of Sipp income for some providers was made on bank interest, so they are really getting squeezed.”

AJ Bell marketing director Billy Mackay says: “There is no doubt that margins have been reduced on cash but most providers will have a combination of cash margins and also the underlying wrapper fees. Their business models will rely on a range of different fees, typically on different types of individual transactions. Pick three or four Sipp providers and look at their fee structure and you will find they make a bit of a margin on a whole range of transactions.”

The FSA recently published guidelines on Sipp regulation for small providers, particularly highlighting the need for transparency on fees.

The FSA says: “It is important that Sipp operators disclose the rate of interest earned on cash accounts, with equal prominence to other charges information.”

Mattison says the FSA spot-light means smaller providers are being squeezed by more than just losses in cash margins. He says: “Since the FSA report, there is new guidance on what small providers should be doing, which essentially means these companies have to beef up their resource to meet demand. So now they have to spend even more money as well as losing out on profits.”

Small providers have not found ways to make up the shortfalls as there isn’t anywhere to go

Wealthtime legal director David Baker says the pressure is on smaller providers. He says: “Now it is becoming clear that we are in a long-term, low interest rate environment, those who used cash margins will have to come up with a new model.”

As a result of the reduced margins and increasing competition, many predict the Sipp sector is about to be hit by a wave of mergers and acquisitions.

Baker believes the crunch for providers is coming as a flight to cash while the markets fell at the end of 2008 means that many have continued to earn adequate mar-gins from cash but as accounts dwindle and members seek bigger margins in bonds and equities, providers will suffer.

Baker says: “Now cash levels are falling as market confidence is returning. So the real crunch is still to come.”

Mattison adds: “Small providers have not found ways to make up the shortfalls as there isn’t anywhere to go. Some firms might come out with new-styled products, some advise as well as offer Sipps, and some have increased fees, but it is a difficult situation. Consolidation will happen, it is just how and when.”


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