The new capital adequacy requirements for Sipp operators effective from 1 September 2016 have been vociferously debated. While the Sipp industry has not been against a change, it has been critical of the methodology used to calculate how much money a firm must reserve so that, should the firm be shut down, there are sufficient reserves to effect its orderly wind down.
The minimum flat rate capital adequacy amount is £20,000 but this minimum is irrelevant for all but the very smallest of Sipp operators. Most will instead be impacted by a two-tier formula, generating a substantially higher six- or seven-figure requirement. This formula is based on the value of assets under administration and the number of Sipps that hold any amount of ‘non-standard’ assets according to the FCA’s definition. Standard assets are those that can be readily realised within 30 days and valued – accurately and fairly – on an ongoing basis; non-standard assets do not meet this criteria.
The standard or non-standard classification can have a dramatic effect on a Sipp operator’s capital adequacy requirements. Hence there has been further debate about whether commercial property can be classified as a standard asset, which is still awaiting full and final clarification.
To illustrate this, two Sipp firms each have 15 per cent of their Sipps invested in commercial property, but firm A has no other forms of non-standard assets within its plans. Firm B has 60 per cent of its Sipps invested in other non-standard assets. If all commercial property were to be deemed non-standard then firm A’s capital adequacy requirement would soar by 97 per cent, whereas firm B’s would only increase by 8 per cent.
It is not just the overall amount of capital adequacy that is affected by asset classification but also the type of capital required. Tier one of the formula can be covered by, for example, share capital, reserves and debtors, providing it is accessible within 12 months. However, tier two, which applies where non-standard assets are involved, must be accessible within 30 days. This essentially means holding cash at a bank which, as far as the Sipp firm is concerned, is dead money.
Too great a strain
The vagaries of the formula mean that bespoke Sipp operators with an existing high proportion of Sipps invested in non-standard assets are well placed to continue to accept such assets. Conversely, Sipp operators with a low ratio of Sipps holding non-standard assets could find accepting further non-standard assets too great a financial strain.
As commercial property remains the most common investment in the market where there are still differences of opinion among Sipp operators, it is important that clarification is forthcoming as it is vital, for an orderly market, that all operators are adopting a consistent approach to this category.
Time will tell as to how this will affect the Sipp market and the choices open to Sipp clients, their financial advisers and investment managers. It could be that some Sipp operators prohibit all non-standard investments, stifling the opportunity to follow an appropriately diversified investment strategy.
This could lead to a polarisation of the market between mass market propositions offering standard assets in the space previously occupied by personal pensions, and specialist propositions allowing full investment flexibility for appropriate clients in the space occupied by bespoke Sipp operators. Would that be such a bad outcome, especially if appropriate regulation of each market followed?
