The much-anticipated capital adequacy regime for SIPPs is finally upon us, and providers now have to get out their abacuses, and remove their shoes and socks, in order to undertake the calculations that will determine the requisite size of their capital reserves, underpinning the membership of their SIPP book of business and portfolio of assets.

And this is by no means a one-off exercise; rather an ongoing series of calculations to reflect an ever-shifting composition of assets and, as a result, a changing capital reserve requirement.

Valuing an asset is straightforward when its value is readily available. The unit price of a collective fund typically changes on a daily basis, and can easily be obtained online, or in a daily newspaper.

But where the value of an asset is – ostensibly – a matter of opinion, valuing it for capital adequacy purposes becomes far more of a challenge. One such example is commercial property, and another is unquoted shares.

For those SIPP providers who permit the holding of unquoted shares within its schedule of allowable investments, the difficulty lies in sourcing someone who is both willing and able to provide a written opinion of the prevailing value of an unquoted share, on an annual basis.

One answer would be to approach an accountant; ideally one who is familiar with the organisation whose shares require valuing. This is because of the raft of information that needs to be gathered, which potentially impacts upon the resultant price per share.

However, any connection between the valuer and the organisation in question, requires careful monitoring by the SIPP provider, in order to prevent a biased opinion being provided, in favour of the SIPP member.
Independence is therefore key; and yet, that comes at a price. It is not uncommon for a four-figure fee to be quoted, in order to undertake the valuation. And where that work is required to be undertaken on an annual basis, it is conceivable that the valuation cost will far outstrip the value of the shares themselves.

I see this dilemma as an unintended consequence of the capital adequacy regime.

Faced with a significant annual cost, it appears likely that members will rather choose to sell or transfer the unquoted shares out of their SIPP, rather than retain them as part of their investment portfolio.

Consequently, the ability to hold unquoted shares - as a unique selling point of a bespoke SIPP - is ultimately compromised by ‘regulatory creep’.

Whether the ‘costs’ of regulation such as these were factored into the Financial Conduct Authority’s (FCA) cost-benefit analysis is unclear, but the costs and consequences of using the “proxy” (FCA’s term) of assets under administration for capital adequacy purposes, may not be viewed as a satisfactory compromise in some people’s eyes.

As things stand, SIPP providers enter this ‘brave new world’ against a backdrop of significant market consolidation, some providers entering administration before the regime even begins, and others charging their members for their costs of meeting capital adequacy.

In addition, the impact of ‘Brexit’ on property fund suspensions has arguably turned a ‘standard asset’ into a ‘non-standard asset’ overnight, by frustrating the ability to readily realise the asset within thirty days.

Laudable as the aims of capital adequacy are, only time will tell how the theory translates into practice. The example of unquoted shares serves to demonstrate how those aims may be ‘lost in translation’.