DC administration systems/ providers – what are the options available to product providers across Europe?
As markets for the provision of Defined Contribution (DC) pension schemes are established and develop throughout Europe, fund managers and product providers will be working hard to determine which markets to enter and what business models to employ in order to capture sufficient assets to make it worthwhile. One of the biggest issues they will face is the matter of administration and recordkeeping. Not only will they have to decide whether to provide such services, but also how will they do so! In other words, they will have to ask themselves the following questions:
q Is there benefit and value in offering an administrative service to complement the investment products? If so, how will this be accomplished? Is the technology and expertise available in-house?
q Is it transferable to these new markets?
If the answer to either of these questions is “no”, then can this capability be accessed/acquired/developed
Even in the event of concluding that administrative services are not part of the product offering, there is still a need for someone to provide this service:
The fact of the matter is that fund management organisations are all seeking to capitalise on the growing trend to DC in Europe. Whether as Investment ‘Only’ or Full Service (investments and administration) providers, these organisations are eager to differentiate themselves in an ever-competitive and fast moving environment.
For those organisations seeking to compete on either a full service or third party administration basis the challenge of addressing the issues of technology and infrastructure is as big as ever. Although there has been a tremendous amount written and expressed about e-commerce solutions for DC, the fact is that there is still a need for an administrative system to support and underpin the front-end.
Unfortunately, the truth is that there is no system or provider who can support a DC business across markets today! The primary reason for this is that the technology that has been developed was done so with a view to a given local market only, and not to support multiple markets.
Specifically, the issue is not merely about being able to support multi-currency products, but to be able to do so in a compliant manner to the local rules and regulations governing pension provision in a given market. In other words, it’s about being flexible and adaptable to the various tax laws, regulations, reporting requirements, product structures and rules in addition to being able to do so in multiple languages.
When faced with this reality, providers are having to adopt a two-pronged strategy for entering the new DC markets in Europe. Firstly, in an effort to respond quickly to new markets, full service fund managers and third party administrators have to find a local provider/solution that will at least give them the basics. However, what many of them are finding is that they are having to spend a great deal of time educating and, in some cases, providing resources in order to obtain the minimum requirements.
The concern with such an approach (on the basis that there is a provider) is that it is obviously a local solution only, and therefore provides little if any leverage into other markets. Moreover, it is a hugely time consuming process to engage in for each market. Finally, it does not provide any benefit of scale.
The second element of the strategy to is identify a longer-term solution, which will provide the back-office capability across markets. This is critical in that providers who view DC administration as a core competency will want to differentiate and base their market proposition on this service. This cannot be achieved with local solutions in every market and, therefore, the only choices are to:
q Enhance an existing capability
q Acquire capabilities elsewhere and modify them to meet local requirements
q Build new
As previously stated, most of the technology currently available to perform DC administration has not been designed to support multiple markets. In this event, neither of the first two options works unless one assumes unlimited resources and financing and no issues concerning time to market.
Unfortunately for many providers looking for an “easy” solution, the only option left is to develop the capability anew. Fortunately, there are DC systems that have been developed in recent years which are technologically and architecturally capable of providing a multi-market DC administrative solution but they often lack the scalability and, almost always, the local market know-how and requirements.
Where does this leave fund managers and third-party administrative providers seeking to offer and compete on a service proposition? Organisations with the appetite and ability to develop the necessary systems solutions will be well placed to capitalise on DC markets as they open across Europe (and the rest of the world). Although there is clearly an upfront cost, there is also an enormous market opportunity for the organisation that gets it right!
One of the issues that any such organisation will face is that the growth of DC in these new markets is likely to be slow. Therefore, providers will not be able to recoup much of their costs until there is sufficient volume to drive down the unit production cost of providing administrative services. As a result, one of the goals is to find ways of obtaining volume!
One way of achieving this is to somehow leverage the already growing markets for mutual funds. As with DC, albeit far less acute, quality mutual fund transfer agency administrative systems are also lacking for both cross-border as well as local mutual funds. The real challenge, therefore, is to be able to develop an administrative platform that can support both mutual fund and DC requirements across markets. The benefit is that in combination, the volume levels necessary to drive down unit costs and provide for efficient administration would be realised even for markets where the development of DC is slow.
The rest will have to accept, and deal with, the local solutions available in each market and wait for someone else to make the investment to develop a cross-border DC administrative platform. Although this approach may have the advantage of not having to make a significant capital investment, it suffers from loss of any early market mover advantage as well as having to accept the functionality and structure of whatever system is developed. For many providers, however, this is perfectly acceptable, if not preferred.
As funded pension provision, and specifically DC, expands throughout Europe, there will be plenty of fund managers positioning themselves to manage the assets of these schemes. The greatest challenge, and opportunity, is to figure out how to address the administrative component of the proposition. In this ever-increasing competitive fund management environment, it will be service, which will provide the differentiation. Therefore, the provider who is best able to develop, and perhaps even market, both a system and administrative cross-border solution for DC stands to gain a tremendous foot-hold in the rapidly growing markets in Europe.
David Calfo is director of Provizion, a London based consultancy

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