The FCA’s third thematic review of Sipp operators and the increase in the benchmark for capital adequacy requirements have reduced the appetite and ability for some in the marketplace to continue in the long-term. The introduction of the tapering annual allowance from April next year is also likely to have an impact on new contributions to Sipps at the medium and high end of the market.
We expect many sales, mergers and consolidations within the industry before September 2016: the deadline by which the new capital adequacy levels must be met. If providers do not meet capital adequacy levels, the operator will simply have their permissions removed. This leaves us with the spectre of a forced wind-up; surely an unintended consequence of regulation.
Should this happen, or where consolidation is taking place, there are several ways a Sipp business can be acquired. T
he first is a complete purchase of the Sipp administration and trustee company, meaning the entire Sipp book, including all the assets (and potential liabilities, although these are often indemnified), is assumed by the new owner. As a condition of the deal, however, it might be required that certain Sipps, where assets are held that the new provider is not prepared to hold, must be extracted by transfer from the book (or the offending assets sold) prior to the deal.
The second route is the individual transfer of Sipps into the new provider’s vehicle. This way, the new provider controls exactly what assets it receives.
The problem lies in the fact there will be some clients holding assets the acquiring firms simply might not want.
Acquiring books of business can be problematic at best and the risk can only be mitigated by considerable due diligence by the acquirer. This process, though, can be hugely time-consuming and may still not fully uncover the extent of “toxic” assets – that is, those the new provider would choose ordinarily not to hold. These problems have already led to one significant Sipp player publically stepping back from any future purchases.
Some notable press commentary recently surrounding FCA action has also identified a number of missold assets that have found their way into Sipp operators’ books. These assets are often of negligible value and are usually the sole purpose the Sipp was created. As such, there are no other liquid assets from which a Sipp provider can deduct their fees and thus be remunerated for the continuing administration of the plan and subsequent disposal or wind-up of it.
What is more, a feature of the new capital adequacy calculation formula is that the greater the proportion of Sipps holding non-standard assets (as these toxic assets would undoubtedly be classed) the potentially higher capital adequacy the provider must hold.
In addition to requiring unremunerated administration, these Sipps may require the raising, and holding, of additional capital reserves.
As a result some Sipps might get left behind or be refused altogether by the new provider.
Some acquisitive firms may be prepared to take a little rough with the smooth, accepting a degree of toxicity for the greater good.
In effect, these firms will act as a “lifeboat” for those Sipp customers that might otherwise not find a provider to administer their plan. But there will be a limit to the number of cases each provider can accept. What happens when these lifeboats are full?
A Sipp provider of last resort has been mentioned; perhaps one that is Government funded or even funded through a levy on existing providers (although this is unlikely). The favoured route would be an existing provider taking on the business after negotiation with the regulator, such that liabilities would be ring-fenced and the Sipps would not count towards the capital adequacy calculation.
We are sure the consequence of some Sipp clients not being able to find a willing provider to take on their toxic assets is not what the regulator intended. Therefore, it is inevitable some may need to find themselves a capacious lifeboat.
Martin Tilley is director of technical services at Dentons Pensions Management