SIPP providers could see cap ad vary as Woodford Equity Income considered ‘non-standard’

Hannah Godfrey reports...

SIPP providers could see their capital adequacy requirements change if they class the Woodford Equity Income Fund as a non-standard asset, Professional Adviser can reveal.

Link Asset Services, Woodford Equity Income Fund’s (WEIF) authorised corporate director, recently announced it was likely the fund would remain suspended until December.

In an investor letter, Link Asset Services said keeping the fund gated until December would provide “a realistic amount of time for Woodford to complete a measured and orderly re-positioning of the fund’s portfolio”.

The suspension of the fund means that it is no longer liquid and, according to the Financial Conduct Authority (FCA), in the case of SIPPs, a non-standard asset is one that can be accurately valued and realised in 30 days. So, because the fund is likely to be gated until December, it is no longer realisable within 30 days and so should be considered non-standard.

As such, platform and self-invested personal pension (SIPP) provider AJ Bell has re-classified the fund from a standard to a non-standard asset. AJ Bell senior analyst Tom Selby said this due to the FCA’s rules.

“We [now] class it as a non-standard asset,” he continued. “And, obviously, that’ll be under review based on what happens with the fund. As soon as the fund is no longer gated, as you would imagine, it would return to being a standard asset.”

For AJ Bell, Selby said this has made very little material difference. The AJ Bell man said the changes has had no effect on the firm’s capital adequacy measures because it already holds excess of the FCA’s requirements. However, he took the view it could make a difference to other SIPP providers that are not in such a strong capital position.

‘Unlikely to be a big problem’

The Association of Member-Directed Pension Schemes (AMPS) chairman Claire Trott (pictured) said she was unsure how big an effect re-classifying the fund could have on the SIPP market.

She explained that part of the capital adequacy calculation centres on how many SIPPs – or the portion of SIPPs – a provider has that holds non-standard assets.

For example, the change would not make a difference if a SIPP already held a non-standard asset as well as the Woodford fund. It would make a difference, however, if a firm held SIPPs without non-standard assets that were invested in the fund. This would then increase the number of SIPPs that hold non-standard assets and, as a result, increase its capital adequacy requirements.

“A lot of the bespoke SIPP market will be in direct stocks and shares, and property,” said Trott. “It wouldn’t necessarily be in this kind of fund, so it’s difficult to say what impact this will have on that kind of market versus the platforms that generally are more fund heavy.

“[The fund] will need to be re-classified, but whether or not it will make any significant difference to any provider – I suspect not.”

She added that, if a firm, by coincidence, had all of their SIPPs invested in WEIF then that could make a difference – otherwise it was unlikely for it to be a problem.

The saga so far

The gating of WEIF on 3 June followed a request from Kent County Council to withdraw the £250m it had invested through its pension fund.

Woodford Investment Management has been hit with further blows since, with wealth manager St James’s Place removing the firm from running £3.5bn worth of mandates and Omnis Investments replacing Woodford on its £330m Omnis Income & Growth fund.

WEIF has shrunk from a peak of more than £10bn in mid-2017 to around £3.7bn at the time of the suspension. Most of the holdings sold in that time have been large-cap names. As a result, its liquidity cushion – needed to meet further redemptions – has dwindled.

In a video to investors at the start of July, Woodford said when the fund reopens it will be constructed in a way that is “entirely consistent with my investment rationale”, focusing on undervalued assets but in the more liquid FTSE 100 and FTSE 250 indices.