The dark side of Sipp consolidation

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The run-up to the 1 September introduction of tough new capital adequacy rules for Sipp providers saw a steady stream of mergers and takeovers. Figures from the FCA show that, in the year to the end of June, a quarter of the UK’s Sipp brands disappeared.

And while the trend accelerated in the final, frenzied weeks before the new rules came into force, most observers expected the dust to quickly settle thereafter.

Not one bit. The spate of consolidation shows little sign of abating. Indeed, several takeovers of varying size were announced last month and large, deep-pocketed firms such as Curtis Banks continue to court smaller players.

More than capital adequacy

With all Sipp providers now meeting (or, at the very least, working towards meeting) the new cap ad rules, there is clearly more to the consolidation trend. Many large firms have built acquisition into their business models and are seeking to grow principally by taking over other firms’ books.

In addition, the extra administrative burden imposed on Sipp firms – first by pension freedoms and now by the new cap ad regime – is squeezing the margins of even the most robust players. This will ensure a steady stream of smaller firms give in to the blandishments of the industry’s bigger beasts in coming months too.

Does stronger equal better?

For advisers, the wave of consolidation is a mixed blessing. On one hand, the emergence of a smaller number of battle-hardened Sipp firms is a positive, as it should make it easier to choose a strong provider.

In the wake of pension freedoms Sipps have never been more popular, and the economies of scale enjoyed by larger firms should now allow providers to invest more in technology while driving down fees.

The economies of scale enjoyed by larger firms should now allow providers to invest more in tech while driving down fees

Given the increased regulatory costs the industry faces under the new cap ad regime, some providers will be tempted to change their propositions or increase charges to recoup costs, so the buying power of larger firms may insulate against this.

But consolidation also risks sparking a creeping vanilla-isation of the Sipp market, which could stifle choice and, worse still, harm service levels.

Few providers now accept the esoteric investments Sipps were originally known for and few of us mourn their passing. But Sipps were created to be highly personalised products and that is at risk if consolidation erodes choice.

It is worth remembering Sipps were originally designed to be the antidote to the one-size-fits-all pensions offered by the traditional life companies. The best Sipp providers build strong relationships with advisers through the quality of their technology, the expertise of their administrators and their ability to understand advisers’ needs.

Having a single point of contact – whether it is on the phone, email or an online chat application – is essential for advisers with clients who have complex or niche requirements. For many, access to good support from a Sipp specialist can be as important a factor as the provider’s fee.

This is not to argue that high-cost, low-volume bespoke Sipps are the best. Far from it. The sector should be as technology-driven and lean as any other financial service. But it would also be badly diminished if consolidation led to the creation of behemoths with impersonal service, limited choice and, worst of all, conflicts of interest between their Sipp offerings and other businesses, such as DFM or advice arms.

In the short term, many advisers will be understandably wary of working with smaller Sipp providers in case they are a potential target for an acquisitive larger player.

But this caution should not be allowed to accelerate the consolidation trend that risks hampering choice, innovation and service levels – and even undermining the whole point of Sipps.

Too much consolidation may benefit the industry’s big beasts at the expense of advisers and their clients. Fewer and stronger does not automatically mean better when it comes to Sipps.

John Fox is managing director of Liberty Sipp