Firms offering Self-Invested Personal Pensions (SIPPs) are facing some tough choices about investments they can offer, thanks to new rules from the industry regulator.
The Financial Services Authority (FSA) has ordered SIPP providers to increase their capital cover for the investments they are offering.
They have drawn up a list of what constitutes standard investments and those products with non-standard investments.
Different investments will need varying levels of capital cover, so the firm and investors are protected in the event of financial problems.
SiPP providers have calculated that the move will mean some offering non-standard SIPPs holding a 20-fold increase in their reserve capital fund.
Capital funds
At the moment SIPP providers only need to have around 18 weeks of capital on their balance sheet – but under the new rules they will be required to hold at least 52 weeks of capital for investors with non-standard assets in their SIPP.
A spokesman from Rowanmoor Pensions warned: “Under the new regulations there will be firms which will not be able to afford to continue offering non-standard investments. They will have to reconsider their strategy on whether they will continue to accept them.”
Another SIPP provider, Suffolk Life, says that currently a firm with 500 plans split evenly between non-standard and standard assets would see an annual income of £800 per SIPP which, with a 10% profit margin, would mean they would have to hold more than £40,000 in reserve.
With the new rules, that same scenario means they would need more than £770,000. If they only had 10% of their SIPPs in non-standard assets they would still have to increase its capital reserve to around £330,000.
A spokesman for Liberty SIPP says there is room for a third category for SIPPs.
Commercial property
He said: “One of the most popular investments in a SIPP, and why many people use one, is commercial property.
“A lot of SIPP providers are saying that commercial property should be moved into its own category.
“We don’t think the FSA will change its position and it’s been known for a long time that they were looking at the capital adequacy of SIPP providers – we just didn’t realise that it would be as draconian as it is.”
The FSA’s new rules become effective next year and spokesman David Geale said: “The SIPP market has grown considerably but the capital required has not changed and needs updating.
“We need to better protect investors should a SIPP operator have to be wound down so for those providers with more assets under administration, they will need more capital.
“And, for those with riskier assets will need even more.”
