Pioneers can pay a price
Sweden is known for its pioneering approach to pension provision. It introduced member choice of investment in its state Premium Pension defined contribution pension scheme, and make asset and liability modelling obligatory for its Allmänna Pensionsfonden (AP), the funds that back the government’s pay-as-you-go scheme.
Such innovations depend upon modern technology for their success – for example, Premium Pension members direct the investment of their money via the internet. Meanwhile, local government, corporate and industry-wide pension funds are looking for multi-purpose systems that can help them manage funds their funds more efficiently and with reduced costs.
The Premium Pension Authority (PPM), which administers the Premium Pension, has built a web-based system that holds individual members contributions in separate accounts, and allows them to access those accounts and direct the investment of their money into a choice of funds.
So far, the system, which PPM launched in 2000, has functioned well. There have been no major technical problems, says Rune Lindohf, of the PPM, and there is a high level of approval by users. In a recent survey, over 80% of users said they found the system easy to use and navigate. This is borne out by usage figures, with over 2.5m members accessing their accounts in the first four months of this year. Of these, over 122,000 switched their funds in March alone, and just over 300,000 in total switched funds between January and April. (This figure remains well below capacity – PPM designed the system to handle up to 700,000 fund switches per day, making it one of the world’s largest systems for unit-linked insurance.)
PPM is continuing to develop the website, with the aim of automating more of the functions such as the updating of fund information, says Lindohf.
Because of the unique character and pioneering nature of PPM’s system, the organisation had to build it
in-house, with the help of consultants, after an earlier attempt to adapt
a third-party off-the-shelf system
failed. Subsequently, the success of the PPM system has made it a model for the development of other schemes, such as Denmark’s ATP system. Despite this, other government, corporate and industry pension funds
in Sweden have more conventional operations, and they are in most cases relying on off-the-shelf systems.
At the simplest level, pension funds such as that of Skanska Financial Services, which outsource investment and other functions, tend to use spreadsheets and other standard business applications to help them manage their operations: Skanska’s uses Excel spreadsheets for performance monitoring, says pension fund manager André Löfgren. Where pension funds undertake more functions themselves, they make use of a range of front, middle and back office systems.
Praktikerjanst AB’s Pensionsstiftelse, the private doctor and dentist pension fund, takes data from Reuters and Ecowin, and uses a combination of in-house systems and the Pam portfolio management and accounting system from New Jersey-based Princeton Financial Systems. Chief executive officer of the fund, Ernst Butti, says that it was not difficult to find technology to meet its requirements, and that it chose its systems on the basis of their functionality, cost, support and maintenance, ease of implementation and ease of use - in that order.
For a number of pension funds, having a single system that will cover most of their business functions is the prime consideration in choosing technology. Last year, public authority pension fund Försäkringsföreningen för det Statliga Området (FSO) chose the Dimension front to back office system from Copenhagen-based SimCorp because it wanted to replace several applications with one integrated system in order to increase efficiency, says Gunnar Balsvik, managing director of FSO.
Similarly, having a single system that could support the whole transaction life cycle was the most important consideration in selecting a system for AMF Pension, a mutual life insurance company and Undertakings for the Collective Investment of Transferable Securities (UCITS) fund manager serving the Swedish pension market. “Because we manage some UCITS, we needed a system with a correct and fast net asset value calculation,” says Birgitta Brandt, head of business support for asset management at AMF Pension. Other important considerations in the organisation’s choice of system were functionality, cost, and the stability of the supplier and the support it offered. “Unfortunately, there are not many European systems that will meet these demands,” says Brandt.
AMF Pension and FSO are among nine Swedish pension funds and related organisations that now use SimCorp’s Dimension system. Others include industry-wide pension fund Sparinstitutens Pensionskassa (SPK), which uses the system for back office and performance measurement, and some of the government AP funds. Mikkel Mørdrup, vice president of SimCorp in Sweden, says that the take-up of the system in the country is largely driven by pension funds’ need to lower their cost of operations, which they can achieve by having a single system cover multiple functions.
“Having one system for all operations minimises the administration of systems by the IT department, minimises the cost of interfaces between systems, and helps automate manual procedures,” says Mørdrup. Dimension includes pre-packaged connectivity to data sources, matching and settlement agencies, custodians and other service providers, further aiding efficiency, he says.
A further consideration is the ability of the system to handle a wide range of asset classes. A low interest rate environment and volatile equity markets has led pension funds to look to other asset classes for returns. There has been an increase in the use of derivatives by Swedish asset managers recently, says Mørdrup, and the Dimension system has modules that can be easily added to handle these instruments.
Princeton’s Pam system also will handle multiple asset classes. The ability to extend instrument coverage, as well as to scale-up to handle greater volumes of trades, or to introduce new performance measurement or risk analysis methods, is important in a system if a pension fund is to avoid having to undertake development projects, with all the resources that requires in terms of IT skills, project management and so on, says Mørdrup.
In addition, cross-asset support is leading some Swedish pension funds to look at using their portfolio management systems for both assets and liabilities. Balsvik at FSO says: “Due to the broad instrument coverage of the Dimension_system, we will now have the opportunity to extend our business scope, and to handle risk analysis and market valuations covering both assets and liabilities on a daily basis.”
Meanwhile, some pension funds are still looking for specialised applications for parts of their operations. “No system can cover all needs,” says Brandt. The fund is planning to implement a performance attribution system from California-based Wilshire. Brandt says that there was a good selection of such systems on the market – AMF Pension chose Wilshire’s Atlas application from seven candidate systems, with flexibility, functionality, cost and supplier support being the key factors in the decision.
Risk management is a further area where specialised systems are favoured and, as with performance measurement, pension funds have a fairly wide range of applications to choose from – not only to install in-house, but also those services provided by organisations such prime brokers, custodians and fund administrators.