It seems hardly a week goes by without reading the depressing news of another Sipp provider failure. With that comes the possibility of additional claims to the Financial Ombudsman Service and claims on the Financial Services Compensation Scheme.
It may be only a minority of Sipp providers tarnishing the ‘Sipp brand’ at the expense of the well-run majority but, unsurprisingly, many advisers on various forums are expressing concern over the state of the Sipp market and the impact claims on the FSCS have on their own levies.
It seems an appropriate time to consider why some of these failures may have come about and how certain sectors of the industry could adapt to avoid continued high-profile failures.
First, there is the question of profitability of the provider. Sipp providers, like any business, ultimately need to make profits in order to survive long term. That may sound obvious but, sadly, profitability and Sipp providers do not always go hand in hand, as industry experience has shown.
However, profitability cannot be considered in isolation. As we have seen recently, a provider can encounter financial difficulty while, on the face of it, being profitable. It appears a lack of positive cashflow, and a very large exposure to distressed assets, can cause an eventual fall into administration. Logic would dictate the two are inextricably linked – illiquid and distressed assets can mean there is little or no cash within the Sipp with which to pay the provider’s administration fees. Longer term, that’s clearly an issue.
So, why do Sipp providers allow themselves to get into this position?
It is hard to find a universal answer. There are likely to be differing reasons affecting each provider, but one aspect that has surprised me time and time again is the desire among some providers to offer the cheapest product on the market – often at an extremely low fixed fee – regardless of the amount of work required on a client’s Sipp in any given year. When I take my car to the garage for its scheduled services, it would be nice to say: ‘Please fix everything that’s needed for a set charge of £x.’ Of course, that is unrealistic and garage owners would go out of business if they offered such a facility.
I often question why Sipp administration services should be any different. Clearly, fixed-price car servicing does exist in the marketplace, but my point is that it will not cover anything beyond the items listed by the garage. Additional work needs to be paid for.
Back in our industry, a Sipp property purchase, for example, could be far more complicated than anticipated at outset and – unless there was sufficient margin within the provider’s fixed fee or there was an element of time-costed work – there is a good chance the provider would make little or no profit. We have to ask why that is the case and if it is a sustainable model.
Sipp providers can learn from costly mistakes made by their peers in recent years – by pricing their core administration work more appropriately and by being very careful about asset acceptance. While the latter appears to be largely under way within an already embattled industry, I’m not convinced about the former.
David Fox is director at Dentons Pension Management Limited