Cracking the German market first
As the European pension market evolves, with new regulations creating greater diversity in the types of pensions available to workers, pension providers are faced with the issue of how to administer the different products they are now able to offer.
Nowhere is this problem more marked than in Germany where new legislation is devilishly complex and highly prescriptive. While some major institutions are developing their own administration systems, perhaps in conjunction with an IT partner, others are looking to third-party systems providers.
US pension administration system market leader SunGard is currently tailoring its application to meet German requirements, with an eye on the wider European market as EU legislation brings more standardisation to pension provision.
Legislation that came into effect at the beginning of 2002 introduced new pension options for German employees. In addition to the standard government social security plan, employees can now opt for private pension plans. Employers can select from five types of occupational pensions they can provide to their workers.
However, though the legislation has in theory greatly extended the choice available – and made some attempt to address the looming pension funding crisis caused by changes in Germany’s demographics – in practice the legislation is dauntingly complex. It therefore presents a major challenge to those wanting to offer the new schemes and requiring new software to support their administration.
Previously, the German pension market was dominated by insurance companies and policies were mostly insurance based. However, the new legislation allows for fund-based pensions, a development that is bringing asset managers and banks into the market, says Thorsten Junike, head of business development and consulting at SunGard in Germany.
“If you look at companies that traditionally administer pension plans they usually have systems based on insurance,” says Junike. “They need new systems to support fund-based plans.”
So far, two types of occupational pensions are proving the most popular with corporates: direct commitment plans and time value (Zeit-wert) plans.
Direct commitment plans allow investment in funds and offer a guaranteed minimum payout. Time value plans allow employees to pay additional earnings such as bonuses and overtime into a plan which they can then use for early retirement, taking a sabbatical and so on.
“Since 2002 every employee has the right to have an occupational pension from their employer,” says Dirk Fach, managing consultant with IBM Business Consulting Services in Germany. But the employers have to choose which scheme to offer and are looking for help from financial institutions and they, in turn, need support for the administration of the new pensions. “In the past, we had a defined benefits environment, now we are going more towards defined contributions so the administration of individual accounts is more important, and to cope with this you need systems,” he says.
IBM has helped Allianz Dresdner Asset Management develop an IT platform to support its occupational and time value pensions services. Meanwhile, some of the larger players are going it alone and developing their own systems, such as HypoVereinsbank. But it would ease the task of introducing new schemes for many financial institutions if they could find a third-party system that was already programmed to handle the complexities of the new market.
SunGard believes there is enormous potential for such as system in Germany and is currently working with local consultants to tailor its OmniPlus system, which it claims is used to manage 70% of US 401(k) personal retirement plans, to the German market.
“On the asset side we don’t have to do too much to the system,” says Junike. In the US, the 401(k) plan allows employees to decide what assets they want to invest in, down to equities by individual stock, and OmniPlus has the functionality to record and manage this. Employees in Germany have more limited freedom – sometimes they can choose between different investment models but not individual investments. A model can be a fund or a life-cycle model, where the allocation of various asset classes is according to the age of the employee, with the percentage available for equities diminishing in favour of bonds as the employee nears retirement age. OmniPlus already has the flexibility to accommodate such requirements, says Junike. However, what is new for the German market is the requirement to handle liabilities. Unlike the US, where employees gets out what they pay in, in Germany benefit payments depend on age and other rules, hence the need for a liabilities module.
Most firms servicing the pensions market in Germany have focused over the past two years on the management of assets, with few offering liability administration, at least partly because there has not been a system available in the market to support this activity, says Junike. The availability of OmniPlus with its liabilities module could change that, he believes.
Lack of systems and lack of experience in the new pension types has constrained what firms have been able to offer, says Ursula Fleischmann, head of pension plan management at Munich-based ComInvest Asset Management. ComInvest offers pension fund asset management and administration services, but only for managing directors, partners of a firm and managing partners. As an asset manager, it is unable by law to offer most other types of pensions, although the firm could do so in a joint venture with a specialist provider, who would need a system to support its activities.
SunGard’s planned schedule is to offer support for direct commitments by the end of September, time value pensions by the end of the year and Pensionsfonds, which allow greater investment freedom, by the end of the first quarter of 2004. Only after this is done will the company consider developing support for private pensions and only if there is a demand from users. “We believe that most companies will offer either direct commitments or time value pensions,” says Junike.
Once it has amended its system to handle the complexities of the German market, SunGard believes that it could be relatively easy to tailor it for other countries – but only, says Junike, when European standardisation of pension funds is implemented in law in Germany and the other European countries as is expected in the next few years. The availability of such tailored systems could encourage the growth of the market.
“There isn’t a European market for pension funds at the moment – there is a French market, UK market and so on,” says Junike. “Maybe in a few years we can have an administration_system solution for European pension funds that doesn’t need many enhancements for individual countries.”