In recent weeks, concerns have been raised that self-invested personal pension fee rates could experience an increase, in line with the growing pressure on bank account rates.
This pressure has already begun to threaten profits linked to retained interest, and with further reforms to bank risk pricing on the horizon, firms are growing ever more fearful of what the future holds.
The Spectre of Basel III
This trepidation has largely been fed by the looming spectre of Basel III, the third round of bank risk pricing reforms that are set to come into practice next year. Commentators are suggesting that the phenomenon of rising costs for banks will lead to a drop in the rates offered to SIPP firms providing customer cash accounts, forcing them to increase their charges in order to cover the shortfall.
This eventuality would come as a double blow for SIPP firms, who are already facing the possibility that their procedures and administration costs will need to be reviewed due to looming capital adequacy changes.
John Fox, Liberty SIPP’s managing director explains: “SIPP providers have turned a blind eye to this issue so far, but I think many IFAs are wising up to the potential for increased fees.
“Along with the looming capital adequacy rules from the FCA, this could create something of a perfect storm.”
Arguably, the effects of turbulent bank rates are already being felt amongst SIPP providers.
Many of these firms work by withholding bank interest, passing on only a small portion of these profits to their clients. This reduces the amount clients receive in interest, but helps to keep fees low and businesses in the black. For some providers, the amount they make through this practice amounts to around 40 per cent of their overall profits.
However, falling bank rates have already started to put a dent in these earnings. Last year, AJ Bell, for example, experienced a £5 million drop in profits, which it said was “entirely due” to the fall in bank rates on cash accounts.
According to Dentons’ Martin Tilley: “We have already seen some [providers] posting of significantly reduced profit … where the interest rate reductions have already bitten; this may well be a continuing trend over the next 12 months.”
These changes are largely attributable to the European Banking Authority’s new rules, which demand that money held on deposit in banks must now be matched by liquid assets that could cover the deposits within a 30-day period. The effect of this is to reduce the ability of banks to earn a crust on these deposits, which forces them to turn to sources that can deliver a better return. Inadvertently, these specifications have turned SIPPs into one of the most high profile victims of a changing policy.
The key issue for SIPPs providers is how to combat these changes and maintain their profitability going forwards: in short, they’ll have to look elsewhere for their future income. Where this will come from remains to be seen, but many customers will be desperately hoping that their pockets are not viewed as a viable solution.