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SIPP Investors Become Collateral Damage - The Law Of Unintended Consequences strikes

Changes to the rules on capital reserves for SIPP operators take effect on 1st September.  They are surely one of the most-talked-about changes for years.  There has already been a spate of takeovers and at least two companies have gone into administration, although it is difficult to say to what extent the demand for higher reserves contributed to these situations.  In any event, perhaps we accept this as the harsh fate markets may have on businesses.  However, we do not expect SIPP members to be collateral damage of regulation.
 
A quick reminder
 
It is nearly 4 years since change was first mooted so here is a quick re-cap – in plain English rather than exhaustive (and exhausting) technical detail.  The Financial Conduct Authority has introduced a new formula for calculating how much capital SIPP operators must keep in reserve.  It is based on the value of assets the SIPP operator has under administration (AUA) and the number of SIPPs that are invested in any part in assets it classifies as “non-standard”.  
 
The formula includes a square root function which has the effect, other things being equal, of increasing reserve requirements relatively slower than asset growth.  The presence of non-standard assets in a SIPP demands significant extra capital.  Before 1st September 2016, the calculation of the minimum capital needed was based on a SIPP operator’s expenses and was equivalent to either 6 or 13 weeks’ expenses.  (We should also note that some providers are, and will continue to be, covered by a completely separate regime.)
 
The visible effects
 
Even before its introduction, the effects of the new regime on the SIPP market have been dramatic.  Its formula encourages rapid growth and acquisition so it is not surprising that there has surely been more corporate activity in the last two years than at any other time since SIPPs’ inception in 1989.  
 
Investment flexibility has taken a hit, too: the formula effectively discourages SIPP operators from allowing investment in non-standard assets, leading some to impose a ban.  
 
And with the new capital requirements being generally higher, in some cases much higher, than the previous ones, some providers have put up fees or introduced new ones, in some cases running into hundreds of pounds.  

Unreported world of pain
 
A smaller choice of providers, limiting investments and raising fees doesn’t sound like good news for customers but it doesn’t compare to what is coming next for some.
 
The use of the value of AUA was a “proxy” in the regulator’s words but, as the formula for determining a suitable amount of capital is based on it, we are now told that assets have to be valued at least once every year.  That is inconsequential when dealing with listed investments (except in rare instances such as, say, property funds being closed).  However, it is a problem when dealing with investments such as commercial property and unquoted shares.
 
It never used to be a problem.  Generally, such assets only needed to be formally and independently re-valued at a critical juncture like taking benefits.  At other times, such expense would have served no purpose for the member.
 
Don’t quote me on that
 
From your client’s point of view, such expense still serves no purpose but now it is needed to calculate the amount of capital reserves.  
 
At times when they are not being sold, the value of a commercial property or unquoted shares inevitably involves a degree of opinion.  For property, desktop valuations and limited use of indexing are possible, reducing the impact.  But, in the case of unquoted shares, that opinion – in the form of an independent valuation – will inevitably be an expensive business, coming as a result of trained accountants poring over accounts.
 
This surely fails any cost-benefit analysis.  Unquoted shares make up a tiny percentage of AUA.  The capital adequacy formula then square roots the valuation, rendering its accuracy all but invisible.  It seems to me the most extraordinary of bureaucratic sledge-hammers to crack a proverbial nut.  
 
What this will do for the small band of investors using, or wanting to use, some of their pension funds to invest in unquoted shares – and what it will do for those companies themselves – seems obvious to me.  The benefit of hammering them is less clear.
 
Andy Leggett
Associate | Head of SIPP Business Development
Barnett Waddingham
 
 
[Sponsored article by Barnett Waddingham]
 
 

 

Author: Andy Leggett
Posted: Tuesday, August 30, 2016 | 9:51:00 AM


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