SIPP Market head-to-head debate
13 October 2019
With increased regulation, governance and the potential repercussions of court cases to deal with, we asked: Can smaller SIPP providers survive?
Here, Claire Trott, chair of The Association of Member-Directed Pension Schemes and Greg Kingston, Group communications director, Curtis Banks, give their views.
First published in the October 2019 issue of Professional Paraplanner
Can smaller SIPP providers survive? NO
Greg Kingston, Group communications director, Curtis Banks
I can’t think of another market that’s faced as much change and as many challenges as the SIPP market, since SIPP operators became regulated in 2007. Beginning with the need to adapt to regulation, operators have managed multiple changes to pension income withdrawal, been subject to no fewer than three thematic reviews and arrive at today amidst sustained negative press and what some consider to be pivotal pending outcomes in court. ‘Pensions are boring’ is a phrase that clearly does not apply to the SIPP market.
SIPP operators have coped with these challenges in a number of ways. Some have proved highly innovative, moving into other markets such as platforms, albeit with mixed success. Others have proved adept at adapting or expanding their services. Some have accelerated their growth by acquiring other providers, while others have chosen that way to exit the market. And a few have failed.
As the market has developed and each challenge has been met, there’s been plenty of speculation over the level of scale a SIPP operator would need in order to survive. When the first acquisitions began, a figure of 4,000 plans was mooted by some, a prediction that hasn’t stood the test of time terrible well. Larger operators have succumbed to acquirers, while smaller providers still survive. But can the latter continue to cling to survival and, indeed, should they?
It has never been correct to say that scale can be determined by how many SIPPs an operator holds. The number of plans is relevant, in terms of providing revenue that can be invested to maintain and improve the business, but for no further reason than that. Sufficient scale – critical mass if you will – is determined by capacity, ability and willingness to change. Do small SIPP operators have the means to adapt and operate as customers and the regulator expects, are they competent to do so and are they sufficiently motivated?
Regrettably, there’s enough evidence that the answer is no, smaller SIPP operators should not survive. I’ll explain my reasoning.
I’ve been privileged to have rummaged under the bonnet of more SIPP operators than most, experience drawn from being involved in due diligence on potential acquisitions and then learning the truth and reality of what has been purchased if the acquisition goes ahead. Not all potential acquisitions do, and there can be a number of reasons why that’s the case. Those due diligence exercises aim to interrogate far more than just the number of plans and types of investments – they cover a wide range of information. Everything found begins to form a picture of the type of business and how it operates.
As I said earlier, scale is not one single thing but a collection of different factors, and one that’s commonly overlooked is the human factor. Put simply, in today’s fast-changing highly regulated environment, small SIPP providers risk not having sufficient human resource, experience and quite simply time to manage everything that they need to.
In smaller operations, there are often key person dependencies that cannot be mitigated or which the business chooses not to for cost or control reasons. The same person running the business may be overseeing risk and compliance, any number of governance committees, heading up sales and interpreting and managing regulatory and legislative change to name but a few. Conflicts abound, and they all need to be managed effectively.
What’s more, in smaller operators there will often be far lower staff turnover in senior positions, denying the organisation the ability to grow understanding with external experience. All these factors can lead to an environment where change risks not being managed effectively or at all, conflicts of interest may not appropriately managed and where few mechanisms exist to effectively challenge decision making.
The regulator probably understands this, and a good recent example is when the regulator was forced to exempt smaller SIPP operators from their investment pathway guidance delivered in PS19/21. This compromise increases the risk to a client purely due to the size of the SIPP operator that they’re saving with. Surely it cannot be right that client outcomes are inconsistent due to the size of the SIPP operator. Imagine if a restaurant were able to exempt itself from food hygiene standards by virtue of having fewer tables than another establishment?
In summary, my title holds two questions: can small SIPP operators survive, and should they survive? My answer to the latter question is no, for the reasons listed above. The answer to the former is, for many, a story yet to be concluded. But we know already know the plot – will there be a final twist?
Can smaller SIPP providers survive? YES
Claire Trott, chair of The Association of Member-Directed Pension Schemes
SIPPs were a very different beast when they came into being over 30 years ago, with a very clear divide between a standard personal pension and the substantially more flexible SIPP offering. Over these years it has been the bespoke SIPP providers driving the change, offering their clients new and improved services and investment options as soon as legislation allowed, and this isn’t something that is going to stop.
As we all know, in the world of pensions there is no one size that fits all. The complexity of the available options and the flexibilities now available to those retiring or passing on their pensions to future generations, means that finding a pension provider to suit your needs is just as important as saving for a pension in the first place. It has always been the case that the nimblest of pension providers have been the smaller players, partly because of their lower overheads and flatter management structures.
It may be thought that the amount of change in recent years couldn’t be topped, but we are in a world that likes to throw surprises into the mix at short notice and those that can move quickly to adapt are going to survive any storm to come. Advisers should be assured that the smaller providers will be ready to change and ensure continued good service at the shortest of notice.
Although it is a complex area with many teething issues, the introduction of the capital adequacy requirements for SIPP providers will have strengthened the position of smaller players in the market, giving greater reassurance to those wishing to use the more bespoke services. A SIPP after all is really all about the service, as well as the proposition and available investments. Smaller providers can give the kind of personal service that the bigger players could only dream of, understanding their introducers’ and clients’ needs and wants on a more individual level.
Pension investors will always want to push the boundaries of what they can invest in, bigger players aren’t going to want or be able to deal with the due diligence required to allow investors this freedom to invest how they see fit in appropriate pension investments. The smaller providers have the expertise to understand what their clients want and make it available, if appropriate. They have the experience of a market that continues to be very complex with dedicated technical support not available from the larger providers.
FCA proactive stance
It is clear that times are changing and the FCA is taking a stronger more proactive stance with regards to protecting pension investors, not only from scammers but also from themselves. This isn’t a threat to the smaller providers, as long as they follow the guidance and build in the appropriate safeguards. The FCA have, and continue to have, discussions with the SIPP industry to understand the impact of any of their proposals on the market. After all, it isn’t in their interest to reduce competition.
Although we have seen significant consolidation in the market, those that remain are committed to providing advisers and their clients with good quality long term administration of their retirement funds.
We have seen plenty of changes to the requirements on SIPP providers since their regulation and every time someone suggests that it will be the downfall of the smaller or more bespoke providers. Yes, some providers have left the market or not kept pace with change sufficiently but that happens in all industries and we must accept that as part of life.
Even the recent court cases have tested the bespoke SIPP market but by engaging and understanding the issues, smaller providers are still able to give their clients options unavailable from the larger providers.
Diversity in a market as complex as pensions is something that we should cherish because it gives advisers and their clients the choice they need and deserve. Big isn’t always beautiful, it can be clunky and slow to adapt with the needs of an ever changing and unpredictable landscape.
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