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Rupert Curtis talks to Retirement Planner about aquiring books containing non-standard assets

Retirement Planner

Do we need a lifeboat fund for non-standard SIPP assets

SIPP providers are struggling to find buyers due to large proportions of non-standard assets in their portfolio. Helen Morrissey asks what can be done about this issue.

Historically, one of the main selling points of a self-invested personal pension (SIPP) was that you could invest in a wider range of assets than you could in a standard personal pension. However, the inclusion of such non-standard assets in a book of business now looks set to cause many providers real difficulties.

High-profile investment failures such as Harlequin and Catalyst have brought the problems associated with investing in non-standard assets painfully into focus, with investors struggling to see if they will receive compensation for any losses.

In addition, incoming capital adequacy requirements set out by the Financial Conduct Authority (FCA) will prove especially painful for those providers who have allowed the inclusion of more esoteric assets in their SIPPs. As a result, we have certainly seen providers pull back from esoteric assets in recent years.

But what of those who have not? Some providers have a sizable amount of non-standard assets on their books. This causes them problems in terms of potentially huge hikes in their capital adequacy payments, which could leave many providers looking to exit the market.

However, those putting themselves up for sale might find little interest from prospective buyers loath to take on large proportions of these assets.

No simple answer

So what happens to these providers struggling to sell their books of business? If no buyer can be found, what happens to those assets and the people who have invested in them?

Talbot and Muir principal David Bonneywell agrees this is becoming a problem: "We are seeing an increasing number of SIPPs that have invested purely into such assets, which have now become practically worthless.

"Unfortunately, as the investment is still technically in existence, the holding cannot be written off and the SIPP closed. With no other assets, the SIPP provider will not be receiving ongoing administration fees, but will still be responsible for maintaining proper records for the scheme and ensuring the relevant returns are completed.

"This will require cross-subsidy from the non-toxic element of the firm’s SIPP book, which should lead these clients and their advisers to question the efficiency of remaining with such a firm. This could ultimately lead to an exodus of the good quality clients on the book."

As good quality clients exit the SIPP, the remaining book of business can only become less attractive to potential buyers, according to MoretoSIPPs principal John Moret.

"There has never been a simple answer to this question," he says. "There are businesses out there that are willing to take on assets that other providers might not want to get involved in.

"For instance, there are still businesses out there with exposure to Harlequin-type investments and that is a real issue as there is no real appetite within the industry for these books to be acquired.

"Indeed, there are only a small number of firms with any kind of appetite for acquisition, anyway. For instance, Dentons, Suffolk Life, Curtis Banks and Mattioli Woods – and they can afford to be choosy in terms of the books they acquire and can drive down prices."

Dentons' director of sales and marketing David Fox agrees the quality of some of the SIPP books on sale can be problematic.

"It is fair to say that we have been fairly conservative in terms of the SIPP books we have taken on. We do not want to dilute the quality of the book we hold by buying big proportions of non-standard assets, though some other providers are more willing to look at these books than others.

"We have not seen a provider go under as yet, but we have seen some of them struggling and the administrative issues that people face when their provider goes bust are massive.

"For instance, how do clients even pay into their SIPP? That is the situation that the new capital adequacy rules were meant to resolve.

"However, as they stand providers are in a Catch 22 situation whereby those that are up for sale are the ones probably least likely to be able to pay their capital adequacy due to the number of non-standard assets on their books."

Curtis Banks is another provider who has been on the acquisition trail. In 2011, it took on the SIPP business of Montpelier which ran into trouble in 2010 and was found to have 40% of its business in non-standard assets.

Montpelier’s managing director Kevin Wells was banned from performing any significant influence function by the FCA with the situation described as an exercise in "how not to run a SIPP".

Despite these difficulties, Curtis Banks managing director Rupert Curtis maintains that the Montpelier business is by no means the worse that he has seen.

"In hindsight, there are worse books out there than the Montpelier book that we bought," he says.

"It was distressed and it was a challenge, but overall it was not that bad. This shows we are not put off by taking on some element of non-standard assets. We are seeing other SIPP books of business out there with much higher proportions of non-standard assets than the Montpelier book."

Rescue mission

So what happens if no buyer can be found for a difficult book of business? The process remains unclear, according to Moret and certainly not helped by the FCA's approach to capital adequacy.

"I'm not sure that the FCA and its approach of needing enough capital to effect an orderly wind-down of the business is going to help in the case of a business that is full of non-standard assets as you have pushed their capital adequacy very high," he says.

"What happens to a SIPP in the event that the scheme administrator fails? Who is the provider of last resort? This has not been thought through. The FCA just wants to ensure that they don't get lumbered with it."

According to James Hay head of technical support unit and chairman of the Association of Member Directed Pension Schemes Neil MacGillivray, some kind of lifeboat scheme needs to be set up to deal with this situation.

Such a body would be granted concessions in terms of capital adequacy so they could run a large non-standard book of business.

"If a provider did lose their permissions, then someone would need to step in and run the business for them. We have seen this happen in certain cases and I'm not sure if we will see this practice grow over the coming years or not.

"There should be some form of lifeboat scheme for assets that would protect providers taking on these assets from unauthorised payment charges."

He continues: "Setting up a lifeboat scheme would give a level of protection to those taking over the business and protect it against claims and potential charges. This is an issue that has been talked about within the issue for quite some time."

Curtis agrees that something needs to be put in place, but points to potential difficulties in administering such a scheme: "Potentially, we could see it work like an insolvency where someone steps in and administers the book until everything is worked through.

"It would almost work like a company going into receivership and it seems to be the only real option, but there are issues there in how that company would get paid.

"Often, SIPPs containing a lot of distressed assets have very little cash in them and so, they are not viable as a business proposition. So how do people get paid if there is no cash in the SIPP?"

So whether a lifeboat scheme is adopted or not, it is clear that something needs to be put in place to address the issue of providers with large books of non-standard assets.

It looks likely that those providers with an appetite for acquisition will be able to cherry pick the best assets from those providers up for sale and we will continue to see consolidation within the SIPP industry.

However, as new capital adequacy requirements look set to push more providers towards selling their businesses, we will see the issue of what happens to non-standard assets coming more to the fore.

It will be interesting to see if any provider has the appetite to take on such a role.


Author: Helen Morrissey

9th December 2014