In his second monthly blog for Sipps Professional, Andrew Roberts, chairman of AMPS, looks at the issues surrounding Sipp and SSAS orphans.
A couple of news stories over the last month have highlighted some of the practical issues arising from the radical proposals for changing capital adequacy calculations for Sipp providers. The victims of these practical issues unfortunately are the consumers.
A few weeks ago, a Sipp provider reported that it had been advised by the FCA to value an esoteric investment at a pound (though the FCA denied such a specific instruction was given). Prematurely writing off an investment may not be fair to the customer and would reduce the capital adequacy requirement under the AUA-model.
This goes against the FCA's principle that more capital should be held in order to manage illiquid esoteric investments if the Sipp provider wants to close down.
I only have access to what has been reported in the press but regardless of the detail of the above case, it highlights why the regulator must surely be moving away from its proposed AUA-based model, unless it is not concerned with "orphaned clients".
Commentators such as Matt Ward of Defaqto reported that there "is certainly a concern around orphaned clients and what will happen to them." Orphaned clients are those Sipp members who are left behind when providers looking to offload their Sipp book in advance of the new capital adequacy rules, manage to pass on only those Sipps that meet the stricter criteria of the receiving Sipp provider.
These Sipp orphans (and for that matter, SSAS orphans) cannot be left homeless. The industry and pension authorities need to create an orphanage for them, some pension wrapper that can house illiquid assets that are no longer considered acceptable pension assets.
The illiquid assets will be held in stasis until such time as they mature or can be liquidated. At that point, a cash transfer value will be paid to a traditional pension scheme for the member.
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Why is this important? There will be many Sipp investors who have part of their fund invested in illiquid assets but have the rest in more traditional investments. To move on with their retirement planning, it would help enormously if the illiquid assets are segregated. This will allow them to seek out competitive Sipp charges and not feel locked in to a provider that may eventually have to close, leaving their Sipp in limbo. The rule prohibiting partial transfers whilst in drawdown should be revoked to help this process.
Like constructing any building, agreeing the structure of the orphanage at outset will be vital and this would need the input from the various authorities and law makers.
The goal should be to build something that is low maintenance, as there will be pressure on the ongoing running costs and hard decisions about how it should be funded (perhaps by the FSCS). A low-maintenance version would prohibit new contributions, transfers in of other pensions not in need of rescue, and even drawdown.
A simple clean structure would be to accept the illiquid investments, provide an annual update and make a transfer out as soon as investments are realised.
A key benefit is that having the illiquid investments under one roof would make for more efficient administration when dealing with the investment providers for transactions and valuations. The scheme administrator could undertake a proper valuation of the underlying investment and the interests of the scheme administrator would be aligned with that of the orphan members.
The new consumer-focussed regulator will doubtless have anticipated the Sipp orphan phenomenon and so we can expect that they will be fully supportive of ways to get an orphanage built.
Andrew Roberts is chairman of AMPs and works for Barnett Waddingham