Waiting to take over
Finland’s biggest pension funds are using modern and sophisticated systems for tasks such as handling new complex investment instruments, risk analysis and the straight through processing of trades. The integration of systems for efficient cost-effective operations appears to be a common goal. However, there are some funds that take a minimalist approach to technology, using applications only where necessary, and expressing scepticism about their value.
Finnish pension funds are facing a number of challenges, including the need to automate trading and business processes, the requirement for up-to-date consolidated investment positions, the increasing use of more sophisticated instruments and trading strategies such as alternative investments, and a demand for greater transparency from members and regulators, says Päivi Karesjoki, managing director for Finland for Stockholm-based financial systems supplier Trema, which has several pension fund clients in the country.
“Although many pension funds get their external mandate data only once a month, or in some cases once a week, this frequency might be either too slow for the pension fund managers to decide if any actions are needed to change their investment strategy, or may even be outdated and incorrect when the pension fund finally receives it,” says Karesjoki. “Therefore, the need for an up to date consolidated fund position becomes imperative.”
The public authority pension fund Local Government Pensions Institution (LGPI) analyses its portfolio on a daily basis against a composite benchmark, says Juha Soininen, portfolio analyst and project manager at the fund. “We look at how we are doing, what our risks are, what part of the portfolio is underperforming and what part is outperforming, and where we could improve,” he says. For this, the fund requires a real-time front to back office system and has implemented Trema’s FinanceKit investment management system to achieve this. The system takes in data from the fund’s trading platforms, and monitors limits and asset allocation, analyses risk, measures performance, and processes transactions through their lifecycle to the generation of settlement instructions and accounting entries.
A key advantage of a single system that integrates front to back office functions is that it provides consistency of data and analysis, says Karesjoki. “If the fund has one system for risk management and another one system for performance measurement, and the systems have different algorithms to calculate the market value, the results may not be comparable,” he says.
With a target of 4% real return, and a goal of operating efficiency and high quality service to members, LGPI is dependent on sophisticated and effective technology. The fund began implementing FinanceKit in 2002, and has been integrating all relevant systems in the organisation to it, including data feeds from Reuters and Bloomberg, to make it the central system in the organisation. The fund is still in the process of testing the interfaces to the trading platforms and settlement system, but expects to have this completed by the end of June. To help it achieve its target return, the fund now allocates 3-4% of its money to alternative investments, and for these instruments it uses the Private i system from New York-based The Burgiss Group. Data from this system is also fed into FinanceKit for overall portfolio analysis.
Multi-employer pension fund Ilmarinen Mutual Pension Insurance Company uses the Dimension front to back office system from Copenhagen-based SimCorp. (Dimension and FinanceKit appear to be the most popular investment management systems among Finland’s larger pension funds.) This enables it to achieve internal straight-through processing (STP) of trades. The fund is currently considering whether to implement what it calls external STP – integrating its Dimension system with the systems of its external partners, such as its broker, custodian, etc. “We have made a few studies about the matter and our biggest concern is the cost-benefit ratio, which doesn’t look very attractive to us because we have a very low number of transactions,” says Jukka Katainen, business unit manager at Ilmarinen.
Ilmarinen is also currently implementing a risk budgeting application from New York-based risk data and analytics supplier RiskMetrics. Ilmarinen is using RiskMetrics’ application on an application services provider (ASP) basis; RiskMetrics runs the software at its site in London, and Ilmarinen transmits its portfolio data to the application and receives reports back online. This is a cheaper way of using the software than installing it in-house, and is becoming an increasingly popular way of using risk management and other types of applications, with RiskMetrics now supplying almost all its customers in this way.
To help manage its risks, Oko Bank Group Pension Fund uses applications from California-based risk management data and technology specialist Barra. It uses Barra’s Aegis equity risk and Cosmos interest rate risk models and the company’s TotalRisk system for calculating the market sensitivities of investments, value-at-risk and other measures. But while this system is ‘excellent’ for risk and portfolio management of assets, it is not so useful for liability risk management and balancing the two, says Tina Schumacher, risk manager for the fund. And because asset and liability management (ALM) is the biggest challenge Oko Bank Group Pension Fund faces, the fund is now looking for a specialised ALM system. It may decide to develop a system itself to meet its exact requirements, or it may choose a third-party system.
So far, the fund has three third-party systems under consideration – MoSes from Sydney-based Tillinghast Software Solutions, VIP from global consultancy and software provider Watson Wyatt, and QRM from Chicago-based Quantitative Risk Management. The first two are aimed at insurance type businesses, so are appropriate for a pension fund, while QRM was originally developed for banks, but since the pension fund operates on behalf of a bank there are some advantages to this type of system, says Schumacher. “In the end, we have to try to fit our figures for risk and ALM in with those of the bank, and you can run into some problems if you have different types of system,” she says.
The fund also makes a point of keeping abreast of developments in risk management systems - where there is continued progress in functionality, says Schumacher - and keeps its Barra system under review.
Many of Finland’s pension funds believe technology is a key to the successful operation of their business. Jussi Laitinen, chief investment officer at Ilmarinen says that “technology has a supporting function in keeping our investment process as cost-effective as possible”, while Soininen says that his fund is proud of how many of its staff now actively use technology and take an interest in how the organisation can best use its systems.
However, a number of Finnish pension funds seem to use systems only out of necessity, and see little added value or possibility for using new technology for innovative responses to business challenges. The manual processing of data, orders and/or reports is still fairly common, and this results in a higher operational risk, says Karesjoki. “Many pension fund managers have the conviction that systems do not allow or support better automation, and believe that no system available can actually automate new sophisticated instruments that need a large number of controlling points,” he says.
Several Finnish pension funds said that technology was only of marginal help in solving their current problems. The manager of one fund, who did not want to be identified says: “I don’t believe that technology can solve any real problems for our fund, or help us overcome our major challenges. Technology is a servant, and not even a very good one, but one which is always waiting for an opportunity to become the master.”
Although Finnish pension funds do not yet seem to be making use of the internet to give members access to their individual accounts, the funds have created a joint website to provide pension information to current and future pensioners. Because information from all funds is gathered under one roof, people can easily access their whole pension coverage and registered employment history. Employees are also able to get an estimate of their future pensions, make pension applications and ask questions online.