The products themselves – for Sipps are now treated as packaged products even though most practitioners would probably regard them as more of a service – have progressed from niche market to the mainstream, much assisted by the A-Day changes, and the number of providers is now in the hundreds.
Sipp administration has, however, shown little tendency towards uniformity and with such a wide range of providers, from small specialist operations to big insurance companies, the offerings vary widely in their sophistication and scope.
There are a number of Sipp administration systems on the market but they only provide the framework and the detailed administration varies from largely manual to highly automated.
However, automation becomes harder to achieve as the provider offers members a wider range of investment alternatives. Some life company offerings are really more akin to personal pensions, with additional flexibility only offered if required – and at a price.
The full offering, almost by definition, means each case will be different, significant manual input will be required and staff quality is critical.
Sipp administration is more complex than for other forms of individual pensions because, in practice, the Sipp provider has little control over the investments. These are all with third parties to which the client wants to entrust his fund and the Sipp provider must deal with those third parties no matter how difficult it is to do so.
If information has not been provided by the third party it cannot be given to the client and trying to obtain it in a regular manner can sometimes be nigh on impossible. The client has no interest in the administrative inefficiency of the chosen investment medium, just the performance achieved, and the Sipp provider will generally get the blame for administrative failings for which it is not responsible.
Sipp providers are used to these challenges and generally do their utmost to sort out problems to the best of their ability. Adding to this already demanding environment, the A-Day rules of April 2006 meant that, for the first time, providers needed to know exactly what their clients and investment advisers were doing for HM Revenue & Customs-reporting purposes, and to stop them straying into the realms of taxable property.
In effect, providers have to act as the agents for HMRC now tax has become an integral part of pension savings. A rather benign environment existed before that, whereby HMRC would generally use its discretion to allow a dubious investment to be disposed of with no tax consequences.
Those days are long gone and the current regime imposes considerable added administrative burdens on the Sipp provider and failings can even lead to financial penalties in the form of scheme sanction charges.
Then, in April 2007, a new factor entered the equation – the FSA. It was inevitable that Sipps would become regulated at some stage as there is just too much money involved to avoid it. Such products are a victim of their own success.
FSA compliance requirements were imposed on a diverse industry and many were ill-prepared for it.
At first, it appeared the additional requirements would not affect administration too greatly but now we know regulation is going to be no formality.
The FSA has conducted its first in-depth review into Sipps and the range of recommendations it has come up with on how they should be administered provides a template of best practice for the industry.
Some recommendations have come as a shock, particularly those suggesting there is a need to monitor the suitability of members’ investments. This had been assumed to have nothing to do with the provider and be entirely the responsibility of the client and the adviser.
Yet, in a way, this could already have been the case because Sipp providers are also the trustees of the members’ plans, even where the member is a co-trustee. As such, trust law applies to them just as much as to the traditional type of pension scheme trustee, unless they can claim to be bare trustees.
Therefore, as trustees they really should be concerned with suitability, even though this seems to go against the whole point of Sipps allowing a member freedom to invest.
It is not going to be easy, particularly as there is the potential of a challenge to advisers’ advice. It will add greatly to the already complicated business of administering Sipps but these requirements must become embedded in the culture of the Sipp industry.
Perhaps, if it enhances the reputation of Sipps and helps prevent the sort of bad publicity an occasional problem case can cause – which must be avoided now the industry is mainstream – it could be a good thing.