Pension funds in Europe have chosen to outsource their back office and IT activities for two main reasons. The first is that fund administration is often not a core activity. A pension plan’s primary task is the overall management of the plan. Specialised service providers can often run non-core activities like fund accounting more efficiently and effectively, through economies of scale and accumulated expertise.
The second reason is that outsourcing may be the only way that pension funds can achieve their core business objectives. This is particularly true of the IT area, where pension funds need to choose the right partners and the appropriate software to implement their asset management strategies.
The rationale for outsourcing fund administration is largely that dedicated fund administrators can do it better and more cheaply. This was behind the decision of Lombard International Assurance to outsource some of the fund administration services of a Sepcav that it had designed for the Luxembourg-based managers and partners of the international accounting firm KPMG.
Although Lombard acts as the general manager and administrator of the KPMG plan, it has sub-contracted the fund accounting to two Luxembourg-based service providers: European Fund Administration (EFA), a specialised and dedicated fund administration and shareholder
servicing company set up by Luxembourg banks, and Kredietrust Luxembourg (KTL) a subsidiary of KBC providing asset management and information technology. KTL is also the asset manager of the KPMG Sepcav.
Lombard has outsourced asset management and fund accounting to enable it to concentrate on the core business – general scheme management – and to keep the costs of ancillary services down. Lombard says it has negotiated ‘advantageous’ conditions with its asset managers and service providers to provide clients with an attractive package. Customers for future Lombard Sepcavs can either use the existing package or choose any other appropriate managers or service providers they want.
European pension funds are also choosing to outsource back office services as an adjunct to global custody mandates. The imperatives of global custody and fund administration are quite different. Appointing an external global custodian is non-discretionary – pension funds are obliged to so – while the outsourcing of fund administration is a discretionary, commercial decision
However, a custody mandate can act as a bridgehead for the outsourcing of ‘added-value’ services. Global custodians are now competing on the breadth of services they can offer. The key building blocks are global custody, multi-currency accounting and performance measurement, trustee and depositary services, back office outsourcing, and fund administration and transfer agency services.
When Nestle Switzerland’s Sfr3.2bn (E2.2bn) pension fund awarded a mandate to Northern Trust earlier this year to provide domestic and global custody, the mandate included related services such risk performance and measurement services, on-line services, processing the Swiss securities transfer tax (stamp duty) and reporting and offshore fund services.
Similarly, when ABP Investments appointed ABN AMRO Mellon Global Securities to provide core custody services in May, it also mandated them to provide full investment accounting, compliance monitoring and securities lending services.
Tim Harding, marketing manager of Mellon Trust, says that the joint venture between ABN Amro and Mellon was created to provide this kind of package: “With global custody we are providing a core service. On top of that we are able to offer clients a whole range of value-added services.”
Tom Berendsen, chief operating officer at ABP Investments, comments: “We expect the comprehensive added value services they can provide to contribute to the maximisation of our assets.”
IT outsourcing is high on the agenda of European pension funds. As streamline and centralise their activities, more of them are looking to IT companies for asset management software that offers straight through processing (STP), a single structured messaging policy across all systems.
The investment division of PGGM, the E50bn pension fund for Dutch health-care and social workers, wanted to create internal and external STP for its systems to provide better access to centralised investment information. It went to Toronto-based Financial Models Company (FMC) for a solution, and has installed FMC s front, mid and back office integrated software.
Henri van de Flier, information manager for PGGM Investments, says that PGGM chose the FMC product because it was looking for newer and increasingly standardised technologies. “We envisage that an integrated system linked with other PGGM technology and software solutions will increase efficiency, cut costs and ultimately increase returns, with the resulting benefits passed through to our current and future participants.”
Similarly, ABP, the E150bn pension fund for public employees in the Netherlands, has gone to SunGard Investment Management for STP software. The aim, again, is to integrate the software into ABP’s system architecture.
Rob Bauer, project manager front office at ABP Investments, says that cooperation with SunGard is part of a long-term partnership. “We needed a front-office system to support the implementation of our investment strategy. We did not want a proliferation of different front-office packages and we required a combination of portfolio management, trade order management, compliance, trading and performance measurement and attribution.”
KLM Pensioenfondsenkantoor, which administers funds for the airline’s cabin crew personnel, pilots and ground staff, has also gone outside to solve its IT problems. It wanted to create a new pooling structure for its portfolios and began to look for an outsourced system last year when it realised its existing system was not up to the job.
In July, it chose UK-based Princeton Financial Systems PAM system for mutual funds investment management and accounting. KLM Pensioenfondsenkantoor will use PAM to manage three separate portfolios, creating a new pooling structure with the existing portfolios.
Paul Vermeulen, head of operations at KLM Pensioenfondsenkantoor, says the fund was also looking for a provider that could act as a partner in its business. “The functionality and technology that PAM offered was only part of the equation. It was equally important in our selection process that we choose a vendor with whom we could form a long-term strategic alliance.”
Utrecht-based NIB Capital Asset Management, the E24bn specialised fixed-income manager owned by a joint venture of ABP and PGGM, has also licensed Princeton’s PAM to replace an in-house system. NIB specialises in the analysis, structuring and management of European fixed income and derivative portfolios and provides pension funds, insurance companies and banks with an opportunity to invest in these portfolios via mutual funds containing those assets.
Michael van Diemen, managing director of NIB Capital says: “We made the decision to go with PAM because of its complex fixed-income capabilities, the mutual fund processing and ability to work with our chosen middleware and other complementary systems to enable us to achieve straight through processing.”
“Also critical to our decision was the positive experience that ABP has had with PAM. We felt it was the right system to help take us in the direction we want to go.”
Few European pension funds can avoid outsourcing any of their activities. One area where many pension funds are unlikely to have sufficient in-house skills is the internet. For example, Pensioenfonds Metaalindustrie (PMI), the Dutch metalworkers pension fund, is using Amsterdam-based internet house WDS to develop a communications concept to help the client servicing of PMI. The concept will be translated into a new web site and a communications campaign.
For even the largest pension funds this kind of outsourcing makes commercial sense. They want the best systems and are prepared to go outside for them. However, there is also a contra-flow of ‘insourcing’ within the largest funds, both of back office functions and investment management. Michel Meijs, head of information at ABP, says the process is ongoing. “ABP regularly evaluates whether outsourcing of any of its services remains the right approach from the viewpoint of efficiency and effectiveness. So at some point in time the decision whether to make or buy could result in insourcing services.”
The lesson of Europe seems to be that pension funds are likely to pick third party provision with some care, choosing only services that they believe can reduce costs and add