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Money Mailbag: My SIPP fees have increased, why?

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“My SIPP provider has increased its fees citing “capital adequacy costs” as the reason, what are these?” Gary, St Albans.

Martin Tilley, director of technical services at Dentons Pension Management replies …

Self invested personal pensions (SIPPs) are financial products regulated by the Financial Conduct Authority (FCA) and one of the FCA’s prime functions is to ensure that consumers’ interests are protected.

One of the ways it does this is to make sure that any SIPP provider it regulates holds sufficient available assets so that, should for any reason the business get into difficulties resulting in the need to wind it up, there are sufficient resources for it to continue to trade for the time necessary to enable all of its clients’ individual SIPPs to be transferred away to another SIPP provider. This is called their “capital adequacy”.

These rules have always been in place, but a review by the FCA several years ago revealed that the levels then in place were insufficient to meet their purpose and so they introduced a new calculation formula which led to revised minimum capital adequacy requirements. These requirements came into effect on 1 September.

The new formula is complicated but includes reference to:

  • The value of all assets held in the SIPPs of the provider
  • The proportion of SIPPs that hold non standard assets

A non standard asset is one that cannot easily be sold or transferred for fair value within 30 days. The FCA deem that non standard assets take longer to sell or transfer and so SIPP providers holding these assets are required to hold higher levels of capital than those that do not. For some SIPP providers the level of capital they are now required to hold has gone up by considerable multiples of those previous held.

The process of making sure the SIPP provider’s asset records are sufficiently detailed and putting into place systems to administer the new requirements has resulted in considerable work for some providers.

In addition, the FCA also require the SIPP provider to continue to monitor and value these assets regularly and report to them on a quarterly basis confirming that they continue to hold at least the minimum capital requirements.

Some SIPP providers have felt it necessary to quantify these previously unforeseen costs of enhanced regulation and have in some instances passed them on to their clients by charging additional fees either as a one off sum or in some cases in an increased annual fee.

The result of the FCA’s actions has however been to ensure that SIPP providers will be sufficiently financially secure, to enable clients to transfer away without concern should for some reason the SIPP provider otherwise fail.