BLOG: Will pressure cause the SIPP price bubble to burst?
Martin Tilley of Dentons wonders whether the self invested personal pension market (SIPP) is in for a shakeup – and what that could mean for consumers.
The popularity of SIPPs has grown to such an extent that they have become the financial must-have for many even modestly wealthy pension savers. There is a wide choice of SIPP offerings from over 100 different providers ranging from simple platform based SIPPs offering access to funds and shares only, to the full range versions where commercial property and private equity investment can be made.
Competition has been such that many SIPP providers have entered into a price war, driving margins down to attract business, but these practices along with some other significant legislative and regulatory changes could result in a shake-up in the SIPP provider market as early as the latter part of this year.
Deterioration in administration service has been a popular topic lately, highlighting that at times the reduction of fees has been at the expense of resources. While technology can aid administrative processes on the simple SIPPs, sufficiently skilled staff must be in place where individually chosen investments are selected. As the saying goes: you will always get what you pay for. Cost cutting will often result in a reduced product. This along with other pressures on the industry will require SIPP providers to reassess their business models and offerings.
The changes announced in the Chancellor’s last budget require pension providers to provide “free face-to-face guidance” to their clients on reaching a benefit payment event. This guidance of course has a per capita cost and must either be absorbed from profits or funded through some other means. An increase in fees seems a logical step, particularly for those firms who have a large number of modestly sized pension pots. Further, with the proposals permitting a total withdrawal of their client’s pension funds at retirement, these SIPP providers might be losing many of their clients immediately after the guidance is provided. Neither of these announcements were anticipated and therefore could not have been budgeted for in their business models.
But it is not only the budget announcements causing price pressure. The Financial Conduct Authority, which regulates SIPPs, will shortly publish its requirements for the capital adequacy reserves for SIPP providers. It is anticipated that not only will an increase in the reserves be required but that enhanced record keeping and procedures will be required. These additional cost burdens will need to be funded from somewhere….
Martin Tilley is director of technical services at Dentons.