PensionsSep 24 2013

Due diligence on Sipp back office systems

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Over the past few months, the focus on Sipps has been on capital adequacy, bank commissions, failed investments and takeovers. Price and service are at, or near the top of, an adviser’s checklist when recommending a Sipp, but how often do they delve into the detail of the back office systems used? This is, after all, the engine that powers the Sipp product and advisers need to be sure it has the power and reliability to deliver in the long run, both in terms of regulator requirements and the needs of advisers and their clients.

The FCA’s requirements are increasing for Sipp operators and without an efficient administration system behind a Sipp, there is likely to be chaos. More people will be needed to extract, manipulate and create the data requirements which will inevitably impact on the future pricing, increase the risk of error and may mean some companies are simply not viable in the future.

Regulatory watch

Since Sipps became regulated in 2007 the requirements from the regulator have increased, partly as it has finally started to understand the product better but also due to its findings in the thematic reviews completed in 2009 and 2012.

Sadly, it identified some bad administration practices and poor controls and the subsequent failure of some Sipp companies provided the FCA with the additional fuel needed to continue its focus on Sipps. This resulted in CP12/33, which was issued in November 2012 highlighting the FCA’s concerns that Sipp operators were not holding sufficient capital to effect an orderly wind-down if they exited the market.

There has been a lot of attention on this – quite rightly so – and it will be interesting to review the regulator’s response, expected at the end of the year. But is it not missing something? If a Sipp operator can meet the capital adequacy requirements – whatever they turn out to be – that is all well and good, but if they have poor administration systems, the Sipp will be heading for the scrapyard and it will be impossible to, in the FCA’s words, “facilitate an orderly wind-down” if they choose to exit the market.

Because of the capital adequacy proposals, advisers are starting to complete more detailed due diligence on Sipp operators but, led by the FCA’s influence, the new emphasis is on finance rather than the back office system powering the Sipp proposition. At some point the realisation will kick in that the price of a product will increase if the back office system is not running smoothly. Online tools are a key element for advisers and often these are of a very high standard. However, just because they come with “go faster” stripes and alloy wheels, it does not mean they are consistent with a back office system that may be more akin to a Reliant Robin engine with fluffy dice.

It is not easy to ensure the right systems are in place at the right cost and with the right number of administration staff and controls. The number of staff employed by Sipp operators varies enormously and there is no right answer to how many Sipps an administrator can look after. It will depend on the flexibility offered by the Sipp product and the controls in place, but the number of administration staff is an indication of how good the back office system is and how well the Sipp is run.

There is not a huge choice of back office Sipp software on the market. The older systems are database-driven, typically attracting higher risk, inefficiencies and consequently higher costs. Extra staff will be needed to extract, manipulate and regurgitate data in the required formats. Producing statutory reports, evidencing TCF, producing meaningful management information, having clear checks and audit trails are just some of the issues which require manual intervention. This takes time and manual workarounds are not only costly in time and staff but also carry a higher risk of error with additional controls having to be introduced and managed.

But there are options. Some companies write their own internal systems and the newer Sipp systems are process-driven, having initially been designed to meet the growing demands of platform-based Sipps. These systems have controls embedded within which vastly reduce the risks associated with handling client money or processing investments as well as other controls to ensure, for example, pensions are not overpaid and TCF can be clearly evidenced. They have automated processes and enable the regulatory requirements to be more easily met without data having to be manually extracted, adapted and subject to potential error.

Advisers need to understand at a high level the system used by a Sipp operator: whether there is more than one, or if there is any dependency on spreadsheets or manual workarounds outside of the main system. Whatever system is used, advisers should check what basic controls are in place, outlined below.

Checking on basic Sipp controls

• How is tax relief reclaimed and invested each month on contributions?

• Is there a clear audit trail of the actions taken and by whom?

• Are daily cash reconciliations carried out?

• Are client money requirements are met?

• Are investment details held clearly for each client?

• Are benefit crystallisation events accurately calculated and checked?

• Are there controls to ensure there is no pollution of client money?

• Are fees applied consistently?

All administration systems need regular servicing and updating and continued investment but an MOT may identify failures and the need to change to a new system.

New software

It is a brave and undoubtedly costly decision to upgrade to a new model and change administration systems. The costs of the system and of the time needed to implement it cannot be underestimated. No administration system can be future-proofed and it does not matter how much time has been spent reviewing the specs and deciding on the extras, testing the most complex cases and ensuring integration with any internal work management or financial accounting systems; there will always be some teething problems.

Time, effort, expense and a few grey hairs go into changing software systems. Key decisions will need to be made on integration with other company systems or external online tools. Is the existing software to be scrapped or will it continue to be supported for legacy business, or will running two systems be inefficient and costly in the longer term? Timing is key to ensure that business continues if one system is permanently switched off. Will there be dual running of the systems? How thorough is the testing and training for staff?

Decisions will be taken on the data held on the old system and how much is moved across. If not all data is transferred, how this decision was reached and how data can be accessed is important; inevitably somebody will need to use it, and probably in a short timeframe. Often a big issue is whether the data is clean in the existing system or has the flexibility in the data fields allowed for inconsistencies and irregularities which have perhaps been known but not addressed in the past. Will the unique client reference change, have pensions reviews been completed, are there any crossover issues, will adviser charges still be facilitated, will real-time information be affected and will service suffer due to training or lack of staff experience?

There are many issues which will have been questioned, discussed and debated at length. Advisers need to understand the reasons for the change and are reassured that it is business as usual for them and clients. Any change should have a positive impact on the firm, not only to service the adviser and meet the regulatory demands but to enable the business to grow robustly in the future and meet the shareholders’ expectations.

Being robust

Whatever back office system is used, Sipp operators need to help advisers understand their systems are robust and regularly serviced and that risks are managed and controlled. The FCA has focused on poorly run Sipp operators and it is now time for the competent operators to step forward.

The final notice served to Kevin Wells of Montpelier Pension Administration Services by the FCA must be the catalyst for Sipp operators to improve where they need to or take the brave decision to change systems. For advisers it is a warning they must start to look more closely at back office systems before making their Sipp recommendation. The FCA must realise there is a potentially serious crash pending far bigger than some of the other Sipp issues on its radar if administration is ignored.

Julia Bassett is chief executive at Barnett Waddingham Sipp