Sipp clients’ savings are under threat from a “double whammy” as potential consolidators pull out of the market and capital adequacy rules hit administrators.
Last week, Suffolk Life announced it would no longer be pursuing acquisitions because it is too difficult to weed out “unacceptable assets”.
Firms still actively looking to acquire Sipp books warn savers could face huge penalties unless the Government gives administrators extra protection akin to those afforded in pension liberation cases.
A Money Marketing Freedom of Information request also reveals that nine Sipp operators failed to meet the current capital adequacy requirements, ahead of the new regime taking effect in 2016.
So will savers be caught by a failing market, or will providers swoop for back-books when firms are forced into fire sales?
Suffolk Life says its exit from the consolidation market was due to its inability to determine exactly what assets were held within Sipps.
The firm has made four acquisitions of Sipp back-books over the last three years but found targets could not be adequately assessed. Strategic partnership director Chris Jones, who led the acquisition business, has decided to exit the company following the decision to focus on organic growth.
Head of marketing Greg Kingston says: “Our position has arrived through frustration. There just isn’t the market out there we thought there was in the first place. Some of the experiences we’ve had of our successful acquisitions have been less than satisfactory.
“After due diligence you discover that once you start to transfer, a whole host of assets start to appear that were not documented. Sometimes that can be assets that we do not want, or even that we don’t think are allowed within pensions at all.”
Money Marketing understands Suffolk Life’s 2012 acquisition of Pointon York was one such problematic deal. Industry insiders say the decision to stop acquisitions is driven more by the firm’s parent, Legal and General, favouring the platform Sipp market.
Kingston says: “We’re probably more diverse than people realise. Between 20 and 25 per cent of our book is administering platform pensions for Cofunds and others.
“While the bespoke Sipp market starts to dry up in growth – with a few notable exceptions such as commercial property – we’ve got really strong growth through our link with Cofunds.”
Talbot and Muir head of technical support Claire Trott shares Suffolk Life’s concerns. She says: “We are still actively looking for suitable Sipp and SSAS books to take on in the future but do not want to put our other clients at risk by taking on a mess from someone else that could jeopardise our service.”
Consolidators Mattioli Woods and Curtis Banks both confirm their continued commitment to acquiring back-books, but Mattioli Woods operations director Mark Smith says HMRC needs to intervene.
Smith says some small bespoke Sipp providers face a “double whammy” of increased capital requirements and falling cash flow as non-standard assets become too expensive to hold.
He says there is a real chance of providers “falling over”, potentially leaving members at risk of a 40 per cent tax charge if HMRC deregisters the pension scheme.
To protect members, he argues HMRC should promise to limit the tax liability on administrators who step in, as is the case with occupational schemes where The Pensions Regulator has appointed firms to intervene.
Smith says: “We’ve spoken to HMRC before about how the dangers of those liabilities flowing to a new scheme administrator are very real. In occupational schemes, The Pensions Regulator has said if an administrator is appointed to a scheme as a result of regulatory intervention, the tax liabilities are not held by the new party, but they are with Sipps.
“If HMRC could look at doing something similar that would really assist with some of the issues because no-one’s going to pick up books if they think liabilities will flow through to them.”
Last chance saloon
There is growing evidence Sipp providers could be on the brink of collapse.
Last summer the FCA publishes its third thematic review of Sipp operators and wrote to the chief executives of all providers. The regulator said it found “widespread” failings within the sector.
Now a Money Marketing Freedom of Information request reveals the extent of the regulator’s findings.
The review covered 97 Sipp providers, of which 13 operators agreed to make changes to the types of investment permitted and 22 agreed to make changes to the controls on the investments they allow.
In addition, nine providers – 10 per cent of those in the scope of the review – failed to meet the capital adequacy requirements in place at the time.
The regulator says 177 firms have the permissions required to be a Sipp operator, of which 174 are believed to be open to new business. But the FCA admits it does not have a record of the number of active or live Sipp investors.
Kingston says: “The implication is that those nine firms that failed capital adequacy rules in 2014, have no chance of passing the new requirements in 2016. That’s quite shocking.
“The fact that the FCA doesn’t have a record of the number of active Sipp investors makes me question whether the regulator understands the full size of the Sipp market.
“It probably is the 80/20 rule – where the majority of business is with the firms they are aware of – but that still leaves a lot of consumers in firms they have no understanding of.”
Stefan Fura, director, Furnley House
The exit of Suffolk Life from the acquisition market brings into focus the importance of the due diligence process. You have to be responsible and ensure you’re looking under the bonnet because cost isn’t everything, sustainability is also important. Brings an extra layer of requirements for advisers but reinforces the benefits of taking advice, we’re well placed to help clients navigate what could be a bit of minefield.
The news that Suffolk Life has stopped actively seeking new acquisitions of books of Sipp business is in itself not a huge surprise. The reason it gives for the move should not be either – concerns about the quality of the business available.
There are very few examples of a book of Sipp business being sold and the acquirer then demonstrating that it has been able to run the new book profitably. In 2004 Capita acquired over 20,000 Sipps – the old PPML business – and within 10 years announced it was closing its Sipp operation. And of course Suffolk Life was itself acquired by Legal & General in 2008 at what most commentators saw as a pre-recession premium price.
There have also been a series of smaller “deals” over the last few years with Curtis Banks and Mattioli Woods being the two main protagonists. James Hay have also showed their hand with the purchase of the remnants of the PPML book from Capita and more recently the acquisition of the Towry Law book. Add Dentons and Xafinity and you have just about exhausted the list of companies apparently with an appetite for acquisition.
Consolidating Sipp books can be fraught with problems. Apart from the obvious risks associated with toxic assets – deep dive due diligence is essential with these deals – there are all the other risks common with acquisitions. Incompatible operating systems can often be a barrier – moving Sipps between platforms or in some cases inheriting paper files can drain resource and increase costs.
Often a lot of the “value” of businesses resides with the knowledge of the key people, particularly with smaller Sipp businesses that have specialised in certain areas, such as commercial property. Securing those people as part of the deal process can be key – and expensive – and clearly the location of the vendor’s business can be a big factor in cost containment.
There continues to be a lot of talk of further consolidation in the run up to the new capital requirements for Sipp operators that kick in next year. The FCA’s recent clarification on some of the detail of these requirements is welcome but it doesn’t get away from the fact that some Sipp businesses simply won’t be able to raise the capital necessary. That could spark a further wave of consolidation activity but with limited demand it looks to be a buyers market.
Sipps have always had a reputation for being “sticky” – a Sipp is for life in most cases, particularly following the new retirement freedoms. That means that valuing Sipp books is akin to valuing an annuity stream of fee income – discounted by the degree of risk. And there lies the issue.
The jury is out on whether a strategy built around acquiring books of Sipp business will prove more profitable and sustainable than organic growth. That’s why it’s possible the Suffolk Life move is sensible. Too many advisers and clients have seen service levels drop off alarmingly after a Sipp business has been acquired. That reputational damage is probably the biggest risk of all.
John Moret is principal at MoretoSIPPs