Capital issues
Still top of the priorities list for providers is capital adequacy. For the second time, we asked Sipp providers to report on their current capital position: how they would fare on 1 August 2013 if the proposed requirements were in place. Details are shown in Table 3 and those that did not provide a response have been left blank.
The purpose of this analysis is not to highlight those that do not meet 100 per cent of the proposed requirements as poor providers; it is purely to give a reflection of the industry as it stands and how far it will have to go to be ready. Unsurprisingly, most of those who chose to respond were at the upper end, but not all. Attivo reported 46 per cent coverage and Rowanmoor reported 50 per cent.
But this does not mean a business is doing badly – Sipp providers are under no obligation whatsoever to hold the proposed level of capital at present and, as Rowanmoor’s Mr Graves points out, that capital could be being put to use. “What would be the point of holding 100 per cent of that capital today when it is not working for you?” he says.
Advisers will naturally be interested in the financial strength of Sipp providers before placing business with them; hopefully those who have not responded will be more transparent if asked to account for their position directly by advisers. Sipp operators need to be able to answer advisers’ questions about their financial position, says Martin Tilley, director of technical services at Dentons. “IFAs are more keyed in to asking about financial strength than they were a year ago,” he says.
The uncertainty is causing problems for those wanting to sell off their book or make acquisitions. Mr Tilley says not knowing what the final rules will be makes it harder to make such decisions. “No one can make plans and no one can invest properly for the future,” he says.
There has been some buying and selling of Sipp books, but nowhere near the mass consolidation that has been expected for years. Mr Conway, of James Hay, believes that it is largely down to unattractive pricing. “I think what has put off contraction of the market is unrealistic expectations of valuations of the business,” he says.
But Sipp providers that cannot meet the capital adequacy requirements might find themselves without a willing buyer. This has led to a new term being coined, with potential ‘Sipp orphans’ being left unable to operate and unable to transfer their clients to anybody else. It is unknown at present how many toxic assets sit in Sipps, but any Sipp operator looking to take over a book of business will have two aspects to consider: the cost of the purchase itself and the additional capital needed to be able to back that book. Regardless of the costs of the former, if the latter significantly increases the reserves needed, it will significantly impact on any operator’s ability to go down this route.
