Stephen McPhillips: The numbers game of SIPP consolidation

Stephen McPhillips explores the consolidation in the SIPP market and warns if deals are going ahead largely to drive client numbers ever skywards what follows might not be a pleasant experience for either client or adviser

Over recent years there has been a pattern of provider consolidation across the self-invested personal pension (SIPP) industry.

Some industry commentators expected the pace of consolidation to be somewhat greater than it has actually been in practice. This then begs questions around why consolidation is a feature of this industry in particular, and why it has proceeded at a pace below some expectations.

SIPP provider consolidation

The prevalence of SIPPs and providers of these is worthy of note. It’s a large market and advisers and consumers have lots of choice when it comes to selecting a provider that fits their needs.

SIPPs come in various guises ranging from restricted investment choice collectives-only arrangements, through to full bespoke schemes that allow a very wide range of investments such as direct commercial property investment, loans to unconnected parties, hedge funds and so on.

The nature of a provider’s book of business may dictate whether it is likely to be a target for a consolidator.

This is understandable, given the potential for synergies across the businesses to exist and be exploited. For example, it would be unlikely that a relatively small specialist provider of bespoke SIPPs would wish and/or try to acquire a very large platform SIPP provider (although it could happen in reverse if a large platform provider feels the need to do so). In any case, consolidation is a fact of life in the SIPP world, and one that needs to be borne in mind.

Pace of consolidation

If we accept that this has not happened as much as may have been expected, what might some of the reasons for this be?

One reason might be a negative impact on the consolidator’s capital adequacy position.

Another clear reason might be the quality of the SIPP provider’s book of business; if it is heavily laden with distressed or “toxic” assets, it might prove wholly unattractive to a potential buyer on the grounds, perhaps, that such assets will taint its own clean book of business, prove difficult/costly to administer and present difficulties in terms of liquidity to cover its fees; cashflow is a critical factor for many businesses.

Having said this, there has been some consolidation of stricken SIPP providers’ books of business in recent years. This, in turn, may have impacted on service levels provided to the existing clients of the consolidator as it struggles with the challenges of integration; merging IT administration systems, migrating clients onto new charging structures and so on, might be more difficult than anticipated.

Regardless, it seems that some consolidators’ business models are to try to grow as big and as quickly as possible; in effect, it appears to be a numbers game for them. But, at what price to the clients?

Potential impact on advisers and clients

If consolidation takes place in a carefully controlled and considered manner, where true synergies exist across the two businesses, it can be a significant benefit to adviser and client.

For example, the increased scale in the consolidator’s operation may allow it to provide levels of technical and sales support that outstrip that of its competitors. If this can be combined with high levels of personalised service, the end result of the consolidation exercise could be an overall enhanced service and product proposition for adviser and client.

In addition, advisers and clients of both the consolidator and the consolidated provider will not want to feel the effects of the acquisition activity, so it is vitally important that the service standards they have come to expect from the provider are maintained into the future.

That might be a challenge if key people in the consolidated provider are exiting the business as part of the deal; be that in the short or medium term.

If, however, the consolidation is taking place largely to drive client numbers ever skywards within the consolidator’s business, that might not be a pleasant experience for either client or adviser. If indeed it does become a numbers game at that point, there is a possibility that service and support suffer, to the detriment of both client and adviser.

Stephen McPhillips is technical sales director at Dentons Pension Management