Issues

The FCA’s Policy Statement on Capital Adequacy Requirement could still prove to be a bombshell for the SIPP market if capital surcharge estimates are correct

7th June 2013

It’s been a couple of months since we took a look at the FCA’s pending increases in Capital Adequacy (CA) requirements of SIPP operators. The reasoning for CA increases goes something like this: The SIPP world has grown like topsy over recent years as more and more people have looked to take a more active interest in building a decent pot for retirement. Over £103 billion of assets has now poured into some 110 SIPP operators.

Naturally some of this investment has a higher risk profile than assets held in cautious managed funds, trackers and the like in your average personal pension. Some, such as investment in foreign property development funds, has been positively fool-hardy on reflection. There have been some well-publicised failures. The FSA/FCA took the view that because nearly two-thirds of SIPP operators (66%) are administering pensions policies invested in ‘non-standard’ assets like commercial property, and that many of these assets lack liquidity (i.e. cannot be quickly sold for the right price/profit), in the worst case scenario in which an operator needs to be wound down; these firms must hold a great deal more ring-fenced capital than they do today to ensure members do not lose out if their assets have to be moved to another provider.

The Consultation Paper on this (CP 12/33) published November 2012 at http://www.fsa.gov.uk/static/pubs/cp/cp12-33.pdf) gave out suggested increases of CA to the higher of £5,000, six weeks of expenditure or 13 weeks of expenditure if the operator is holding client money. The FCA is also toying with the idea of increasing the minimum capital requirement from £5,000 to £30,000. The FCA believes that the cost of winding down the average SIPP operator and transferring assets to a new provider should be somewhere between £20,000 and £30,000 so in this way in case of operator failure there will be no additional cost felt by the members affected. Predictions for the impact of new CA requirements range from ‘this is going to wipe out up to 80% of operators’, from Jams Hay: http://www.ftadviser.com/2013/04/02/pensions/sipps/capital-adequacy-to-wipe-out-of-providers-james-hay-G7yvQtDIb1wRUM6zpzNeZK/article.html to the slightly milder analysis from AJ Bell: http://www.ifaonline.co.uk/retirement-planner/feature/2261465/what-effect-will-capital-adequacy-changes-have-on-sipp-market  

But research from Suffolk Life which was recently published in Money Management does reveal the potential impact of the proposed capital surcharge for SIPP operators whose assets under administration are predominantly non-standard. Based on a SIPP operator with 2,000 SIPPs, with an average fund value of £250,000 each, 10% profit/90% costs margins, based on average income of £800 per SIPP, with 50% of AUA classed as non-standard assets, Suffolk Life estimated that the capital surcharge alone on this sample company would exceed £1m (£1,118, 034) which means that with initial capital requirements of £447,214 (as already detailed in the CP) that leaves this small to medium-sized operator needing to ring-fence over £1.5m in cash to operate this book. If Suffolk Life’s estimates are anywhere near correct; and we will find out within the next few weeks when the relevant Policy Statement is published by the FCA; then capital surcharge demands on operators which are heavyweight in non-standard assets has got to have a seismic impact on all but the largest or most cash-rich SIPP operators. We suspect the unveiling of this Policy Statement will bring SIPP operators back on the front pages of the financial trades when it is published.

The only question is whether the current focus on cracking down on pensions liberation schemes will delay its publication until after the holiday season. We wait with baited breath....

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