German pension funds face a range of challenges depending on the organisations and members they serve, and the pressures upon them to adjust to the current market environment. Technology plays a key role in enabling them to operate more efficiently, manage their investments with greater sophistication and meet members needs.
Munich-based Siemens KAG, which manages the pension fund for electronics giant Siemens, says that its major challenge is to move from being purely a supplier of asset management products to becoming an organisation focused on solving problems for its clients. Today’s pension fund needs to become more like a business intelligence unit, says Joseph Mehl, managing director Siemens KAG.
But at the same time, the Siemens fund is attempting to focus more closely on the asset management aspect of its activities, particularly in regard to investment products in the European market, and technology will play a key role in enabling the fund to meet its targets in this area, says Mehl. Technology is particularly useful in enabling the performance of the fund’s own asset management to be measured and analysed, as well as helping manage risks, improve efficiency and provide transparency of the costs of business.
Siemens KAG runs a portfolio management system supplied by Forbatec, which was recently acquired by US financial software giant SunGard. Routing of investment orders to brokers and markets is via the Swift financial services messaging system, using Microsoft’s BizTalk for the straight-through processing of transactions. In addition, the organisation uses a risk measurement and analysis system from California-based Barra, and a performance measurement and attribution system from London-based StatPro.
Given the difficult markets of recent years, performance measurement and attribution has come to take a higher profile among pension funds, and technology suppliers are attempting to meet the growing demand for appropriate products. In November last year, Sydney-based performance and attribution system supplier Alphai increased it presence in Europe in response to interest in its products. With Winterhur Asset Management already a client in Germany, the company is now targeting pension funds with its Max system, working with Frankfurt-based consultancy Quartal Financial Solutions.
Alphai offers a choice of how pension funds can implement its technology, says Thomas Berg, director of European operations for Alphai. Users can either install the application in-house in the conventional way, in which case the fund will have full control over the application, and access to all the flexibility of its functionality. For example, the fund could analyse precisely why returns are good or bad compared with a benchmark, pinpointing how factors that effect the returns might change from month to month. “A pension fund would not necessarily get this level of detail, and choice of ad hoc reports, from an outsourced solution,” says Berg.
Alternatively, pension funds could use the Max system on an application service provision (ASP) basis, whereby Alphai runs the application on its premises and funds send their data online to be analysed, receiving reports electronically. Users can still make use of the functionality of the system for ad hoc reports, such as adjusting the period to be analysed, the method of aggregation, etc, but no longer have the responsibility of installation and maintenance of the system, although they will have to load their data, benchmarks and other information. Finally, Alphai is planning a full outsourcing service for pension fund performance and attribution analysis, to go live this year, where the data management, including benchmarks, and soon is handled by Alphai. users will still be able to request ad hoc reports with this service, says Berg.
Meanwhile, the pension fund of the European Central Bank (ECB), based in Frankfurt, has opted to outsource performance measurement and attribution to its custodian. The fund is currently in the process of choosing a new custodian, as well as an investment manager.
“When selecting the new custodian we realised that they now provide software, even website access, where you can measure performance and get other useful data,” says Paul Haenen, administrator, ECB pension fund.
The ECB fund is in the final stages of implementing a new pension administration system, supplied by Heywood, based in Cheshire, England. The ECB fund is Heywood’s first European customer, although the company is well established among pension funds in the UK. The fund chose the system primarily because it seemed to best fit its requirement for extensive flexibility in its operations.
“We have a very flexible pension rules so people can choose out of all kinds of options when leaving and transferring - for example, they can choose a combination of getting deferred pension entitlement and getting part in cash and in transfers,” says Haenen. “And we very young, only being established in 1998, so we have not experienced all the cases that can happen yet, so we needed a developer that could be very flexible and adapt to our needs.”
The system will also help the fund to provide members with special calculations with regard to transfers in and out, leavers calculations and retirement projections.
The ECB fund also looked for a supplier with which it could have a long term relationship as it anticipated using for system for many years, and was reassured that Heywood had many UK clients with this kind of relationship with the company, says Haenen. One difficulty is that Heywood does not have any staff in Germany, and nor can it access the ECB’s system remotely for maintenance or upgrades.
One of the upgrades the fund would like to make to the system, and which it has agreed with Heywood, is to migrate from Heywood’s proprietary database to the widely used Oracle database. This will be done in 2005, and once in place it will be easier for the fund to find database specialists with experience of Oracle locally. Another consequence of being the sole Heywood customer in Germany is that ECB fund staff have to travel to the UK to discuss customisations, for user group meetings and so on. “This is not ideal but it is OK,” says Haenen. “The ECB is an international organisation with a lot of concerted organisations in 25 states so we are used to travelling.”
The fact that the ECB fund is an international organisation operating in so many countries is one of the challenges of its operations, with the requirement to manage the transfer of pension fund entitlements from other countries to the fund’s system, says Haenen.
One of the ECB fund’s other plan for the future is to provide members with access to their accounts and other information online. “Currently members have access to our internal intranet where we put all the relevant documentation - annual reports, performance of the funds, etc. - but it is not possible to access individual member accounts or do what-if scenarios,” says Haenen. “There is a demand from some members for this, and we also think it is necessary, so we have scheduled it to be developed by Heywood, but not until 2006.”
Other German pension funds are known to be thinking along the same lines. Munich-based multi-employer pension fund Bayerische Versorgungskammer says that it is planning to develop more services for members that they can access via the internet in the next few years.