September 2007

Off to a good start

Recent surveys have confirmed what those of us working close to the coalface have known for some time - that the demand for SIPPs continues to grow. The latest market survey suggests that accumulated assets have now reached close to £40 billion with the total number of SIPPs approaching 300,000. Of course these figures disguise a wide variety of propositions. Indeed the latest figures show that the largest writer of SIPPs to date, by some way, is a life company.

However, delve behind the figures and one finds that almost 90% of the SIPPs are invested in the company's own funds. So while legally established as SIPPs most of the investors have in reality what was, before this window dressing, simply a personal pension - albeit one that provides the ability to expand the investment range in the future.

We can expect to see a rapid growth in this type of SIPP in the future as more life companies attempt to defend the estimated £300 billion of assets that are currently tucked away in historic personal pensions and other legacy products. Claims such as those made in Professional Adviser (5 July 2007) a few weeks ago that "deferred SIPPs can provide excellent value for money with no upfront fees for self investment services ... until customers decide to self-invest, and even then the charges are lower than most traditional SIPPs" are debateable but I believe the real issue is what happens to those SIPPs as funds grow and the need to diversify investments becomes greater.

My concerns largely centre on the current capacity of the SIPP industry to cope with significant growth in the true bespoke SIPP with wider range investment options. Trade papers are starting to carry stories about long established SIPP firms no longer being able to cope with increased volumes of business. While worrying for the firms in question; the whole SIPP industry ought to take note.

The stories while anecdotal are all the more worrying given the likely further increase in SIPP business. The operation of SIPPs is now a regulated activity and it will be interesting to see what action the FSA takes since the maintenance of adequate systems and controls is an essential part of the risk management of any regulated business. Marketing campaigns based on the ability to accept and process any type of investment can look very attractive but can turn out to be a recipe for disaster unless robust business processes are in place to handle such investments.

Implications of regulation

I have written before about the implications of regulation for operators of SIPPs. It remains early days but it is already clear that different operators are taking varying approaches to issues such as the handling of client money and the reconciliation of client assets. I heard recently of one regulated SIPP operator who has apparently convinced the FSA that it is not holding client money. As a result its solvency capital level is lower than that required of firms deemed to be holding client money and compensation arrangements may also be different.

Most SIPP operators will be subject to client money and client asset requirements. The demands are potentially onerous and problematic. The need to carry out regular client asset reconciliations will depend on whether the SIPP operator/trustee is carrying on the regulated activity of safeguarding and administering investments (including arranging safeguarding and administration of assets) in respect of the SIPP assets. FSA Perimeter Guidance 10.3 question 23 suggests that a trustee is likely to be responsible for safeguarding and administering investments held as scheme assets. If it makes use of a specialist custodian it will be arranging safeguarding and administration of assets. These are potentially regulated activities. However, there are exclusions that may be applicable where the trustee is not holding itself out as a custodian and is not remunerated for providing custody services.

These uncertainties lead both to confusion and to differing operational approaches. Many operators do not reconcile - relying solely on information provided by third party investment managers. Others actually shadow the investment managers' activities and reconcile both cash and other assets on a regular basis. This clearly provides an added level of comfort for investors but obviously potentially involves the operator in additional cost. These costs can be largely eliminated through electronic transfer of data but investment managers use many different technology platforms and perhaps understandably can be reluctant to incur the cost of system development for what for them may be a relatively small strand of business.

Different approaches

At the moment there is no requirement for operators of SIPPs to disclose their operating model and the differing approaches taken to matters such as reconciliations and the capital requirements are probably lost on most advisers. There appears to be a strong case for greater disclosure of these items along with other items such as interest rates on client bank accounts. Now that the FSA has chosen to regulate SIPPs as packaged products it will be interesting to see how it enforces the new rules.

To date SIPPs have largely avoided the reputational damage incurred in the past by traditional personal pensions. If that is to continue then the issues mentioned above need to be addressed. Advisers need to give these issues attention as operational difficulties with SIPPs can tarnish an adviser's reputation - and also involve the adviser in considerable extra work and cost.

As a start advisers could do worse than to ask their preferred SIPP operator some searching questions about their FSA permissions, their solvency capital, whether they have had a recent visit from the FSA - and the outcome of that visit - and the approach taken to reconciliations. They might also usefully ask whether the firm has any regular independent assessment of its service quality and delivery. I suspect the results of such enquiries could be very revealing.

John Moret
Director of Sales and Marketing
Suffolk Life