In six months’ time, April 2017, all Sipp providers will need to have changed their illustration systems so that they show the margin they retain on cash holdings, writes Elaine Turtle, director of DP Pensions.

This margin will need to be shown on the illustrations as an explicit fee or charge. Current changes to illustrations for a Sipp product is part of the FCAs continued implementation of PS16/12, which incorporated responses to the consultation paper CP15/30.

These changes have been met with mixed reactions from the industry - both from providers and advisers alike. When looking at these changes, it is worth taking a step back and remembering that the original intention of producing illustrations for advisers and their clients was to provide a cost comparison of the pension products available.

Debate, particularly within the Sipp industry, on retained interest, isn’t new; it has been ongoing for many years. It is based, in part, on the fact that commentators feel that the illustrations simply don’t help compare product against product. And on the other, those that believe the reason that providers don’t want to reveal the amount they retain is because it is what keeps them solvent.

At the heart of the illustrations debate is that of transparency. I wholeheartedly believe in being transparent and of course in treating customers fairly, I also agree that within the fee schedules that Sipp providers publish, the amount of interest paid should be clear and the client aware of this. The majority of Sipp firms already do this and didn’t need to be directed to do so by the FCA.

One area that is important to this debate is how providers obtain the rates for their Sipp customers. The cash account for a Sipp should be transactional in nature; it is not designed to be a standalone investment. This means that It is difficult to account for in illustrations as the amount of cash held can vary enormously and isn’t a static number.

The individual Sipp provider will negotiate with a bank(s) not based on the individual Sipp customer’s circumstances but on the entirety of the cash holding the provider has with a bank or financial institution. What is sometimes lost in the debate is that a lot of clients do not receive any interest at all on the account they have within the Sipp due to rates being as low as they currently are.

The relationship with the bank or financial institution is likely to have been built up over many years and due to the economies of scale, i.e. the Sipp provider undertaking some of the administration, a higher interest rate may be paid, than the individual Sipp customer might receive on the open market. So for commentators to state that the client is worse off and that the Sipp provider is ‘creaming off’ interest is factually incorrect. The Sipp customer is only worse off if the interest rate is lower than the Sipp client could have achieved directly from the same financial institution.

Therefore, the decision by the FCA to require Sipp illustrations to disclose the amount of interest retained as a fee within the illustration seems nonsensical. It isn’t a fee or charge and so shouldn’t be shown on the illustrations as it means the illustrations don’t provide the comparison that is so important for the adviser and his client.

Elaine Turtle, Director, DP Pensions

Elaine Turtle has worked in the financial services industry for over 30 years and has held a number of senior management roles within the self-administered pension sector. She is a well-known figure in the Sipp and SSAS market place and is currently the Treasurer and a Committee Member of AMPS. Elaine is a Director of the Company and operates from its City of London Office.