Waiting for members to catch up
By definition, IT jargon is at best confusing, at worst incomprehensible. While it’s in vogue to talk of going online and of e-enabling, what does it mean when a pension fund adds an online, interactive front end? And once that front end is enabled and online, what does it mean for the scheme member and, in particular, those whose grasp of the internet is marginally less their understanding of the pension itself. In truth, sometimes quite a lot and progressively more so.
Use of the internet or at least exploration into its potential has recently been the priority of pension funds’ IT strategy. The software market contracted during the mid-1990s as pension funds outsourced a lot of their administration but, according to Andrew Davis, European partner at consultants William M Mercer, all of the players they are familiar with are working on online products that make the lives of pension funds more efficient.
Mercers, for example, is seeing demand for taking information from the front end and putting it on the internet. Or, to cut the jargon, to put benefits statements online and to enable online quotations, modelling and transactions. But, he warns, despite the evident increase in demand, it is difficult to ascertain the real state of the market. “Frankly, it’s quite hard to see through the hype and look behind them to see what exactly is being achieved,” says Davis. “You’ve got to be very careful in evaluating what is being achieved.”
Strategies that aim to ease communication with members and to inform them need careful consideration. Just chucking bland, non-sensitive information on to a website is perfectly straightforward and a lot of funds are doing this themselves. Where it becomes more sensitive is when you move into personal details. “The issues become a lot more tricky and everybody gets very concerned about data security,” says Davis. There’s also concern about email security, about which there remains some doubt. Eventually, these problems will melt away as confidence in the systems grow.
In the meantime, there are some practical problems associated in both DC and DB schemes. Davis gives the simple example of members going online and changing their address. Should the change be made in the pension system or in the HR system? There are numerous functions and changes that sound straightforward enough but in practical terms are more complex.
One step further some pension funds talk of allowing members to change contributions online. “A lot of these issues are coming out for the first time now. People haven’t actually thought about them before they try to implement it,” says Davis. These problems will be ironed out eventually and some of the most advanced systems like Scottish Life’s DC solutions will be providing what is calls straight through transactional processing later on this year.
“If you look forward two or three years to the digital television age you can say that the technologies are all going to merge and you’re going to be able to sit at your telly and look at your benefits. I expect we’re all going to be using this technology,” says Davis.
Developments aren’t all internet-based though. At the end of last year, PGGM’s investment division appointed Financial Models Company (FMC), an IT solutions and services company, to supply its front, mid and back office integrated solution, essentially a straight through processing package. At the time, PGGM was restructuring its IT infrastructure in a bid to enhance access to more centralised investment information.
PGGM initially set out to develop its own in-house investment system but abandoned the project in 1998 as being too drawn out. The fund looked for software providers and settled for Financial Models integrated asset management package and the pension fund hopes that an integrated system will increase efficiency and cut costs.
Phil Banas, managing director at Financial Models Corporations, FMC’s UK subsidiary, says they have witnessed particular interest from the Dutch market. “The Netherlands is a sophisticated market with many large established pension fund companies. They have recognised at an early stage the need to standardise and integrate their internal systems, and to establish standard messaging protocols to external counterparties. We see this pattern across the whole of Europe with many other markets following the Dutch lead,” says Banas.
As chief executive of the Dutch IT consultants Practis, Nico Top knows the market well and agrees with Banas. His impression is that the main development is using the internet as a means of communicating with members. Top says a lot of pension funds in the Netherlands use the internet but to date for little more than a one way source of information. This is changing and it is being embraced more as a two-way communication tool with the members.
According to Top, Dutch pension funds are, in their own way, rather old fashioned in their attitude towards IT but a younger generation of management is bringing about changes. “The internet is a communication tool, a transportation tool for data. Everybody has access to the internet so I think the potential has not been fully explored yet.”
Some foreign companies CSC (Computer Science Corporation), and a few local ones like Practis are producing software solutions. Practis, for example, is working on AKS, an esoteric but practical software package for actuaries enabling them to adapt programmes without the intervention of the IT department. This system is now used by, among others, Swiss Life in Belgium and by the Dutch arm of commercial union.
“Demand for software_systems at the moment is very, very big,” says Top. In general the demand for administration systems is to replace old systems while the demand for the front office is for new systems. Top concedes most of the IT work is being done by the largest consultants but that demand far exceeds supply of administration software. “It’s a niche market and the business is quite complicated. You also need people who are experts in both IT and in pensions,” he says.
Many of the latest developments are specifically consumer-friendly and aimed at the scheme members. KPMG Pensions recently developed Pensions Explorer, a system that informs members more about their pension scheme and the benefits associated with it. The system is a tailor-made for each pension scheme and available to employees either through an in-house intranet or on an individual CD-ROM. Members can then analyse their pensions by toying with early retirement, increased contributions and varying investment returns. “Companies spend a huge amount of money on their pension schemes yet many feel that their employees don’t fully appreciate the benefits of a scheme,” says David Fripp, a partner at KPMG Pensions.
Consultants Bacon & Woodrow is meanwhile developing an internet service for its clients. It is about to release what it has called straight-there.com which is a e-commerce administration system covering DC, stakeholder, group AVCs and Flex and that communicates with members and reports to trustees. “We have a number of clients who have been shown demonstrations who have expressed an interest in it. Because they are mainly complex employers, ie, they have multiple pensions schemes for different categories of employee or because they multiple corporate entities within their organisations so the aggregation of data across all types of schemes is particularly attractive to them,” says Andrew Warwick-Thompson, a partner at B&W.
Towers Perrin, another large administrator and provider of IT solutions to pension funds, is doing a lot of work on internet-based products. That is, according to Neil Barrell, operations director at Towers Perrin Administration Solutions, who says its pension clients all want to put a front end on to their administration systems.
Most pensions clients are after three services from their internet appliances. According to Barrell they want to be educated about their fund – putting the plan details on to the web right through to information on annuities for DC plans. Second is the online equivalent of the benefits statement and finally they want some kind of modelling capacity – something allowing the employee to go in and model on different retirement scenarios.
Real-time websites, which are in their infancy at the moment, will come into their own when online investment changes become standard. More to the point, they will have to. Says Barrell: “Everything on the DC side is unit-liked and, if it’s real time, you’re making the switch based on current unit price. If it’s not real time and the unit price changes over a couple of days, you might as well just have faxed a piece of paper through in the first place.” Barrell says Europe will eventually reach a stage when changes made on the internet will be real time.
In the meantime, developments in the internet and IT should be put into perspective. Yes, pension funds have embraced at least the notion of new technology with enthusiasm. However, There are scheme members who don’t use and will never use the internet. There are also companies that don’t provide access. More to the point, says Barrell: “You must remember, we’re still struggling with this whole investor education thing.” There’s no point providing access to something little understood. This education will in itself take time.