To say that the self-invested personal pension (Sipp) market has changed since and due to the A-day pensions simplification is an understatement of some magnitude. You only need to glance at a 2005 back issue of this magazine, then look at today’s issue, to see that the number of Sipp products and providers has grown exponentially. In fact, the market seems to have grown from infancy to maturity in less than three years.
However, this rapid growth has inevitably led to a reduction in the average fund size across the industry – and the emergence of budget products with more limited investment options. As a result, some commentators have suggested – if only by their tone – that Sipps have become simply a financial fashion, promoted by intermediaries, which is being driven rapidly downmarket by its own success.
As one whose company is known primarily as a provider of ‘traditional’ (ie full-service) Sipps for an equally traditional Sipp market that is becoming diluted, I might be expected to agree with that view. On the contrary, though, I think it rather superficial and simplistic at best.
Although the Sipp market as a whole grew rapidly from inception, much of its value at the top end prior to A-day was concentrated in preretirement and point-of-retirement business – very large transfers from director pension and company schemes for the purpose of providing flexible retirement income.
While this sector of the market is still large in absolute terms, it is becoming a progressively smaller percentage of the whole, as the post A-day focus swings increasingly towards large numbers of younger high earners, who are building up their Sipps through contributions from income. And, while large point-of-retirement and consolidation transfers will continue – at least until all schemes offer sufficiently flexible facilities for unsecured and alternatively secured pensions – they will inevitably become relatively smaller, as the biggest pre A-day pension pots dwindle and the effects of the standard lifetime allowance work through.
Independent financial advisers (IFAs) working in this new and invigorated market now have increasingly heavy workloads of Sipp clients to service and Sipp portfolios to administer. Consequently, they need platforms that allow them to take a more industrial approach, rather than a niche approach, while meeting the service expectations of each individual client. Most, if not all, now tend to favour 100% online administration with high levels of automation.
And collective investment strategies have become increasingly the norm for clients who don’t have special requirements (such as commercial property or structured investments – which in any event tend to feature in larger, more mature Sipp funds).
Costs have also assumed growing importance and IFAs need the scope to charge fees that will support high levels of service, yet keep the total costs at a level that clients will find both affordable and acceptable. They need providers to offer affordable charging, without compromising service standards.
For longer-established providers on the other hand, the challenge is to meet the demands and opportunities of the new Sipp market, while protecting the quality of service received by our traditional clientele, which has more specialised investment needs. Our response has been to invest significant resources in a major upgrade of our online product, eSipp – including the move to a more advanced software platform – and the continued expansion of our investment centre for collective investments. Although eSipp was originally introduced in 2004 as an entry level vehicle for those with limited needs and resources, at its current enhanced level of functionality, it is now the standard solution for the overwhelming majority of customers.
In choosing this route, I would compare us to those Savile Row tailors who now make their expertise available to a wider market by offering ready-to-wear ranges. The cloth is the same, the craft skills and attention to detail are the same – and individual fitting to each firm’s traditional standards means that the results, on anyone of more or less average shape, are virtually indistinguishable in cut, quality and fit from a fully bespoke suit at three or four times the price. Meeting the demands of this market is increasingly important to the survival of Savile Row as a world centre of tailoring excellence. At the same time, the bespoke skills on which its reputation is based are not compromised for customers who want that service and are ready and willing to pay for it.
That last point is a significant one in our own industry, where highly skilled staff, with the depth of knowledge and experience to deal with the more complex service requirements of the top end of the market, are at a premium – not least to handle the more complex manual processes imposed by the current pension rules.
In fact, it is possible that substantial numbers of longer-standing clients could now be ‘over-Sipped’ for their needs – in that they may be paying a premium for options from which they derive little benefit – and we are currently putting considerable effort into encouraging IFAs to review the needs of clients who hold a full-service private client Sipp, with a view to switching them to eSipp wherever it is appropriate to their requirements. In that way, not only will their needs be satisfied at considerably less cost to their Sipp funds, but the maintenance of the bespoke service levels delivered as part of the private client Sipp can be more effectively protected.
From a provider’s point of view, investment in systems that will give their customers more for less, without any loss of profitability, cannot be wasted. With manual systems, we must invest simply to prevent service standards falling as demand grows, but the incremental and permanent nature of enhancements to online technology mean that every penny invested will deliver added functionality and efficiency for those who use it.
The simplicity of an affordable Sipp that fits most people’s needs is very attractive. However, ‘simple’ should not be confused with ‘simplistic’. Our view remains that, in a cost-sensitive sector of the market, an extensive choice of funds and switching flexibility are essential for the active and unhampered pursuit of truly comprehensive investment strategies.
Of course, as an established provider facing new competition, we may be said to have an axe to grind in holding to this view when a more guided approach to investment choice is gaining acceptance among some IFAs. But overall, the diversity and opportunity in today’s Sipp market are healthy signs and should benefit all providers in the long run.
Intermediaries will decide what they want from Sipps. Their main function is to support the levels of service that IFAs find profitable to offer their clients, and different types of platform will meet the requirements of different types of client, provided they are in the hands of professionals who fully understand the implications of their strengths and limitations. My only caveats to IFAs would be to always remember that they are effectively insurers who underwrite their choice of Sipp provider with their own reputation, and to avoid making long-term choices for short-term reasons.
Provided those rules are observed, today’s second generation Sipp market has a great deal to offer to intermediaries, their clients and providers, in equal measure.
It’s all a matter of getting a perfect fit.
Andy Pennie is marketing director at James Hay
