Rising to the challenge
With a relatively young population, higher retirement age and regulations that offer little incentive for early retirement, Iceland faces fewer problems due to ageing than most European countries.
However, local pension funds still face many challenges. There is a rising number of disability claims, fund managers must meet targets in an era of diminished returns, and pension fund members and employers are demanding more complete and timely information on their investments.
Technology can help meet some of the challenges, and Icelandic pension funds are attempting to take advantage of modern systems, particularly those tailored to the local market. The funds have also seen the value of co-operating in the development of systems, which could serve them well as the industry continues to rationalise.
“Technology is one of the keys to solving the problem of the rising number of disability claims,” says Sigurjón Pétursson, chief executive officer of Reykjavik-based financial software supplier Landsteinar Strengur. For example, technology can help funds more efficiently monitor if those receiving disability pensions are also receiving income from other sources, as well as help monitor the results of disability treatment, Pétursson says.
Meanwhile, there is an increasing demand from pension fund members and employers for timely and even real-time transaction confirmations, account statements and reports on investment returns and pension rights accumulation, says Stefan Halldorsson, managing director of engineers pension fund Lifeyrissjodur Verkfraedinga. This means that pension funds must have more data processing capabilities. However, where pension funds are small - Lifeyrissjodur Verkfraedinga has only 3,000 members - they must be creative in their use of technology in order to find affordable solutions to their requirements.
Lifeyrissjodur Verkfraedinga uses
a combination of outsourcing
and third-party systems to run
its business. Investment management, including trading, portfolio management, performance measurement, attribution, and risk management, is handled by external managers.
For administration and accounting, the fund uses the Navision Financials system, originally developed in Denmark and since acquired by Microsoft and supplied by Landsteinar Strengur, and an online application services provision
called Joakim which is supplied
by Landsteinar Strengur’s sister company VKS. (Both Landsteinar Strengur and VKS are subsidiaries of Kögun Group, Iceland’s largest IT software and services supplier.
Iceland has a reputation for high quality software development, and Kögun is known for its state-of-the-art air traffic control and air surveillance systems.)
Joakim is now used by 18 Icelandic pension funds, almost half of pension funds in the country that are actively receiving contributions. (There are around 15 other funds that are no longer taking contributions.) The system covers the process from the receipt of contributions to payment of pensions and compensation. Pension funds submit their data to VKS, which operates the system on its site, processing the data and returning calculated information and reports to the pension funds. The system also allows pension fund members to access various information on their accounts over the internet.
Before adopting the Joakim system, Lifeyrissjodur Verkfraedinga used technology developed in-house. Because of the unique characteristics of the Icelandic pension fund environment, many funds have developed their own systems over the years, and a number continue to use them.
Gunnar Baldvinsson, manager of major pension fund Almenni Lifeyrissjodurinn, says that the
difficulty in finding systems to
meet his organisation’s needs has resulted in an extensive use of
Among the reasons for not using third-party systems, Baldvinsson cites the general liability structure for Icelandic pension funds which differs from liability structures elsewhere; Almenni Lifeyrissjodurinn’s own unique liability structure that differs from most other Icelandic funds; the fact that asset allocation for Icelandic pension funds was until a few years ago different from other countries and, finally, straightforward competitive reasons.
Almenni Lifeyrissjodurinn’s in-house systems cover portfolio management and liability management. “In order to decrease the development cost of in-house systems we have co-operated with other pension funds in the use and development of these systems,” says Baldvinsson.
However, he would not identify these pension funds. In addition to its in-house systems, the fund uses the Bloomberg market data system, plus the EnCorr portfolio optimisation system from Chicago-based Ibbotson Associates. The fund outsources currency management, as well as some asset management.
The major issues for Icelandic
pension funds in choosing and implementing technology appear to be cost, the complexity of modern systems and therefore the expertise they require to run, the support and maintenance they demand, and the challenges they present in terms of integration with other systems for the sharing of data, the straight-through processing of transactions and so on. In addition, security and reliability are key aspects of any
system that handles confidential
and critical financial data, says Pétursson.
The unique characteristics of the Icelandic pension fund environment, plus the challenges of the current investment market and demands for more transparency from companies and members is encouraging further co-operation in developing appropriate technology among the country’s pension funds.
“We have looked at costs, complexity, support and other aspects of operating systems and found that we will in the near future be best served by shared services,” says Halldorsson. Lifeyrissjodur Verkfraedinga used to be relatively backward in technology, he says, but now thanks to Joakim, the fund is on an even level with most other Icelandic
pension funds. “We plan to continue to improve our services and efficiency, and for the most part we will enjoy the same improvements as the other pension funds supported by the same suppliers,” says Halldorsson. Currently, the fund is seeking to increase straight-through processing of transactions and to reduce manual data entry and data management.
An area where technology has a major role to play is in providing employers and pension fund members with up-to-date information on their funds, as well as giving members access to their accounts and, in some cases, allowing them to make investment decisions about their money. Icelandic funds have been taking advantage of the internet to provide information to employers and members.
The Joakim system offers a variety of information to members about their accounts. Halldorsson says that Lifeyrissjodur Verkfraedinga will increase its use of the internet as a tool for communication with members and employers in the future. “We already give members and employers access to their pension and contribution accounts via the internet,” he says.
The co-operative approach to technology development could serve Icelandic pension funds well in the near future. The trend in the country is towards a rationalisation of funds, with many merging their operations in order to cut costs and improve efficiency. “We have seen significant reduction in the number of pension funds in recent years, as funds have merged, and this is expected to continue until we have only 10-15 pension funds,” says Halldorsson.
He predicts that the number of suppliers providing administration systems and other services to pension funds will be even less, probably between five and seven. One of the biggest challenges when merging organisations such as pension funds is in integrating their systems. This can be greatly simplified if funds are using similar systems or sharing one, such as Joakim.