Changes to the rules on capital reserves for SIPP operators take effect on 1 September. These changes are around how the amount of those capital reserves is calculated. They may sound boringly technical but they represent a radical change.
"Raising reserve levels will have been easier for businesses with a broad base, low levels of debt and strong profitability. This has been the case for us."
Before getting into explanations, the first and most important thing to confirm is that our SIPP operator, BW SIPP LLP, holds more than enough capital to meet our new, higher reserve requirement. We have not had to raise debt or equity as we benefit from the financial strength of the Barnett Waddingham partnership.
So what are the changes?
The Financial Conduct Authority has introduced a new formula based on the value of assets the SIPP operator has under administration 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 1 September 2016, the calculation of the minimum capital needed was based on a SIPP operator’s expenses and was usually equivalent to 13 weeks’ expenses. The purpose of these reserves was – and remains – to fund the continued administration of SIPPs in the event that an operator gets into financial difficulty. During this time problems would have to be rectified or, perhaps more likely, the business taken over.
The way the new formula works is likely to exert significant influences on the SIPP market and, indeed, there has surely been more corporate activity in the last two years than at any other time since SIPPs’ inception in 1989. Here, we look briefly at some of those influences and where we stand on them.
Raising reserve levels will have been easier for businesses with a broad base, low levels of debt and strong profitability. This has been the case for us. Barnett Waddingham, as the UK’s largest independent firm of actuaries and consultants, offers a broad range of services to pension schemes, members, employers, insurers and more. You can find out more about our financial strength here.
The new formula demands that a great deal of data be held on investments and that it is repeatedly updated. Modern administration systems make it easier to handle such data and perform essential calculations. We introduced a new system in 2013, which allows us to meet the challenge.
The new formula encourages rapid growth and acquisition. We have been more conservative than others, aiming for steady growth: 'too much, too soon' could bring lasting problems for some.
The formula effectively discourages investment in non-standard assets, leading some SIPP operators to impose a ban on them. We believe in retaining investment flexibility, subject to due diligence.
The new requirements are generally higher, in some cases much higher, than the previous ones, leading some providers to put up fees or to introduce new ones running into hundreds of pounds. The fees for Flexible SIPP have not changed since its introduction in 2014.
For some firms, the strain of funding the new reserves as well as the cost of meeting other concurrent regulatory changes may lead them to postpone or cancel investment in their business. We continue to invest in ours, for instance automating repetitive administration and making more services available online.