Millennium bug keeps fund managers guessing
Opinions among pension fund managers about the threat of Y2K are as varied as they are strong. Some are convinced that the whole issue will turn out to be nothing more than scaremongering, while others are clearly still nervous that we may have settled into a foolish complacency. But the factor which unites virtually every fund is that it has spent a considerable amount of money making sure its systems are watertight
It’s been talked up as potentially the biggest catastrophe on earth since the Ice Age and simultaneously lampooned as the dampest squib of our time.
In this month’s Off The Record we asked pension fund managers to give their views on the Y2K issue, and more importantly how much money and hair they have already lost trying to ensure a smooth transition into the next century.
The response was mixed on whether Y2K had made any impact already on fund activities – almost 40% of respondents said it had. It appears not many of you are taking any chances on whether it eventually will or not.
Only one fund confidently (or perhaps foolishly?) replied that it had taken no action to check its computer systems for Y2K compliance.
Evidently the fear of a system meltdown has posed a serious headache for most pension plans. Half of the respondents said that as a result they had been obliged to make changes to their systems, although one manager said that after a compliancy test they found one minor error which could be corrected within four hours.
Another manager added, with just a hint of delight: “We haven’t changed our system – but we do have many new PCs!”
For some funds, a check of the system has turned into a costly IT refurbishment. About 30% of respondents confirmed that they had replaced their entire computer system as a result. And a slightly higher percentage said they have modified their technology according to compliance criteria.
Unsurprisingly this has hit schemes hard in the pocket. Just over a third of replies noted that the costs involved had been “significant”.
A quarter of respondents breathed a collective sigh of relief and said the cost factor was insignificant. Still, any cost is an unwelcome cost. Unless, that is, it ensures peace of mind. And it seems that pension funds can enjoy the season’s festivities without fear of malfunction. All respondents said that their systems are now Y2K compliant.
However, one respondent points out what is probably at the back of most people’s minds – that all that expenditure may have been money for old rope. “Our systems were Y2K compliant before, but it was just difficult to prove,” they said.
Three quarters of schemes are satisfied that their fund managers have been doing their bit for compliance, but there are suggestions that the relationship may not be as trusting and communicative as desired.
Just over 10% of respondents were not confident their managers had attained compliancy, and one manager expressed doubt over the positive reponse given. “We have been told by the managers that they are compliant, but we are not completely convinced,” they said. Another noted cautiously: “As far as we can be sure, our managers are compliant.”
But the majority of funds appear to be satisfied with written confirmation of a clean bill of health from their investment manager.
A smaller number have carried out joint test plans and one fund has put their fund manager through its paces with a “thorough on-the-spot assessment”.
In terms of custodian arrangements, around a fifth of funds have used the opportunity to carry out a review of services and take an audit of scheme assets.
On a more contentious note, we asked fund managers whether they would believe a supplier which said it was Y2K compliant.
Over 75% said yes, but it appears many are busily trying to convince themselves that nothing could go possibly wrong. “Yes, we trust what our suppliers have told us, with some reservations,” said one respondent. Another fund replied: “It depends who they are!” A handful answered with a simple “no”.
The list of steps taken by funds to become compliant reads like an IT manual, with phrases such as “impact analysis” and “infrastructure tests”. All said their systems have been tested and re-tested to satisfaction, with one manager noting verification by both internal and external teams.
Significantly though, half of the responding funds said they are protecting their investment portfolio against any Y2K problems, with many stopping any significant trades or settlements from mid to late December until early January.
One manager noted that an official national range of controls is being imposed on fund activities and another said payment of pension benefits will be postponed from late December to the start of the new year.
One fund has decided to back up its system data the old fashioned way. “We have taken a hard copy of all the listings of our assets and manual processes,” it said.
A number of funds are using the new year period to reflect on their manager arrangements and carry out reviews.
One investment manager may not be enjoying themselves very far into the new millennium, since one fund confided: “We have put off firing a manager until January.”
So business goes on, and 78% of respondents believe the Y2K bug will be only a minor irritation. One manager exclaimed: “I can’t believe the hysteria over the issue. It’s as if a man was standing on the street corner with a placard saying ‘the sky is falling down’ and instead of laughing we all went out and bought cast iron roofs. People aren’t thinking.” The irony is heavy here, but almost three quarters of managers believe Y2K has been talked up out of all proportion by the media.
However, some respondents voiced a suspicion that we may have become too confident of a smooth transition. In reality, 35% of managers still believe there will be an adverse effect on markets.
Predictions include market tightening and a temporary effect on liquidity. “There will be a minor effect on the market as people hoard cash to reinvest in January, but it shouldn’t greatly affect the markets, which will correct any temporary pricings,” said one manager.
Another comment demonstrated that some people will always seize an opportunity
when it comes knocking: “It will possibly be a great buying opportunity!”
Certainly, none of the respondents predicted Armageddon. Should disaster strike anywhere, 16% of managers think it will be in the less developed markets.
Still, it seems that we have all had just about enough of the whole affair: “I will be glad to see the back of it,” declared one scheme chief.
And we can all be thankful for one small mercy. As one manager pointed out, at least we won’t have to worry about the dawn of the next millennium.