While companies within the financial services industry begin to reorganise their activities by business line on a pan-European scale, rather than by country, the European financial regulatory environment is far from standardised, and each country still has its specific regulations and accounting rules.
Early adopters of pension administration technology want to implement a common IT platform across the European sites. They need tools capable of handling all the rules and processes of each national market involved, instead of using different software in each location. Our group is gaining knowledge of each country’s requirements to integrate them into our pension administration functionality.
Currently in the US, more than 15% of the population is over 60-years-old, and that number will increase to more than 25% by 2050. In western Europe, a little more than 20% of the population is over 60-years-old; that number will increase to more than 35% by 2050. This is placing a considerable and growing burden on European public sector finances.
Retiring workers – whether in the US or the UK – face extended life expectancies as well as curtailed investment expectations, and those at all income levels will turn to financial institutions for help. Anticipating a growing demand, companies within the financial services industry are introducing retirement products that are targeted directly at such individuals.
Europe is shifting significantly in terms of pension provisions. Broadly speaking, there is a major movement from unfunded, state-provided pension schemes to funded, private pension schemes. These private pension schemes take the form of employer-sponsored pension plans, as well as individual plans that operate independently of the employer. The reason for this shift is the aging population with an increased life expectancy, mentioned previously.
The UK has made considerable strides in terms of its pension plans, having begun major reforms in the 1980s, which shifted significant portions of the country’s pension plans into the private sector. As a result, the UK is one of the few countries in Europe not facing a pensions funding crisis. The most popular pension plan type in the UK is the employer-provided occupational plan, with about one third of the workforce participating in such a programme. These programmes are typically contracted-out to services providers. The fastest growing segment of the pensions market is personal pension schemes, which currently account for about 20% of the workforce .
The rapid increase in the number of individuals receiving pensions in Germany, as well as the integration of east Germany, have put considerable pressure on the German public pension system. As a result, the government has been forced to introduce reforms that have increased contributions, reduced benefits and increased the age at which participants can draw benefits.
As part of the reforms introduced in 2001, private, funded pension plans are being heavily promoted with incentives by the government. Company-provided pensions are eroding, since some of the tax advantages that were available to companies funding employee pension plans have been reduced. However, since early 2002, every German employer has been legally obligated to offer their employees pension plans. Employers are not obligated to provide contributions to these plans, but they must offer their employees the opportunity to participate by giving employees the ability to have deductions made directly from their salaries. Employees receive advantageous tax treatment for contributions up to 4% of their salary.
The French pension market relies heavily on government mandated, unfunded pension plans. Reforms introduced in 1999 lead to a system where government pensions would be at least partially funded. In addition to government pension plans, there are a variety of additional, complimentary pension plans that employees are obligated to participate in. These plans are also unfunded. Private, funded pensions play a very limited role, and since 1994, limited tax advantages for self-employed individuals are available. The current government has announced its intention to introduce some far reaching reforms, including tax breaks for contributions to private pension plans, better funding for government pensions, and increases in retirement age. However, these reforms are only in the discussion stage, and have hit considerable resistance from labour unions and other groups.
Which of current US trends could be globally beneficial to adopt elsewhere? A new alternative for US record-keeping administration is the ASP model (Application Service Provider). Vendors such as ourselves sell software through remote delivery methods, which means the pension scheme provider or participant can ‘dial in’ to the scheme through the internet. This eliminates IT development and maintenance for the pension scheme provider, but still gives them the control of their operations. For smaller providers, this is a cost-effective way to tap into state of the art technology, even with a lack of resources for building their own platform.
The average value of a US retirement plan participant’s 401(k) plan was $41,000 (E33,000) in 2003 . While the US industry average retention rate for retirement funds hovers around 20%, providers offering automatic rollover capabilities, have in cases doubled those rates. Given that retirement assets rolled over into individual retirement accounts (IRAs) are projected to grow 10% annually and reach $533bn by 2010, the race for retention will escalate.
Just as it is currently in Europe, the US once considered employee benefit record-keeping an accounting task driven by the elements of time and accuracy. Today, a high-volume processing capability and international connectivity are requirements for pension scheme participants around the world. As more governments focus on mandating pension reform, the amount of new assets flowing into international pension plans will continue to rise.
As a leader in pension administration with software and services that are tailored to meet the specific needs of Europe, we currently can provide technology for pension schemes in the UK, France and Italy, and have implementations in Germany. We have four main products within our employee pension scheme administration suite that are being launched in Europe. These products provide transaction processing for pension scheme administration, mutual fund shareholding, proprietary links for the execution of trades, deposit reconciliation, integrated imaging and workflow, commission calculations, annuity and installment payouts, loan processing, tax reporting and management reporting. These products offer participant services, including integrated voice response systems incorporating speech recognition technology, browser-based call centre solutions and participant financial education.
Each product contains proprietary scripting tools that allow internal customisation without the need for additional code. This means easily defining plan business rules, incorporating site-controlled tables or algorithms and enabling local language screens.
SunGard currently has two of these four products installed in Germany, a country selected due to its appropriate legislation in place. Both have been adopted with an HTML front-end written in the German language. The base engine was also customised to meet the current regulatory environment. Since private plans in Germany are employer-driven, many parameters were created for these individual employers to choose from a variety of choices, such as vesting schedules.
Katrina R-Miglietta is senior vice president of new business development
SunGard Employee Benefit Systems