Pension Funds Insider

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Leading the technological revolution: How the pensions industry is uniting to improve efficiency and risk management

Monday, August 5, 2013

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Technology is starting to infiltrate the pensions industry, with significant implications for sponsors, trustees, members and advisers. But is it also having the effect of bringing together disparate industry stakeholders to focus on the key goals – managing deficits and providing better service to schemes and members?

Pension Funds Insider speaks to both the providers of this technology – Ben Reid, PensionsFirst and John Broker, ITM – and the users – Sankar Mahalingham, RSA and David Cule, Punter Southall – to hear their thoughts.

Moderator: What is driving the use of technology within the pensions industry?

Sankar Mahalingham: Pension plans have moved up the corporate agenda and this is fostering very different relationships between corporate sponsors and trustees. The days when trustees would have come up with some numbers around assets, liabilities and risk and the corporate would simply accept them and then decide how to use them are long gone. There is now a lot more corporate focus on pension plan deficits and their volatility, which is resulting in much more rigour applied by companies to challenging trustees' assumptions and associated valuations. This change is driving the use of technology which can provide real-time information, enabling sponsors to have much more faith in the numbers produced which they can then use to make more effective de-risking and investment decisions.

David Cule: Certainly, the corporate interest is now much stronger than previously and there is also a demand to access scheme information quicker. If one looks back to when pension schemes were a small part of the corporate organisation, it mattered little that funding calculations took months, even years, to produce as they had very little real impact on day-to-day operations. Nowadays the funding position of the pension scheme is of paramount importance to the corporate yet, at the same time, senior management only have a few days a month or quarter to look at the problem. Hence they need the information to hand at that exact point – they cannot afford to wait months for it. And this is where technology is a game-changer.

Ben Reid: As a provider of technology I think the biggest change we have witnessed over the past three years is in the breadth of people looking to access technology and the information it provides. We have realised that it's not just the pension plans that are managing the risk but all of the advisers, service and solution providers as well. These parties are beginning to realise that they don't have sufficient information and analytics to be able to satisfy their clients increasing demands and are therefore turning to technology to help them provide value-added products and services.
John Broker: Drilling down a little, I think that auto-enrolment may prove to be one of the biggest catalysts for technology really taking hold. A number of young people will come into pension scheme membership over the next five years and they will expect their information to be clearly presented, online and work through technology generally.

You mention that people want to make decisions more quickly, but is this being pushed by regulatory change or pulled by the availability of technology that can facilitate that?

SM: It's a combination of the two. Even as few as ten years ago, sponsors and trustees weren't driven to make timely decisions because they had lots of different options around how they could fund the scheme without the kind of regulatory and accounting pressures we have now. Those pressures have driven people to think about pensions from a risk management point of view rather than from an ongoing funding point of view.

DC: I think you're right there – the regulatory changes have focused the mind, and focused the process. You can trace this back to the introduction of the minimum funding target which highlighted the fact that pension schemes have a power over the corporate sponsor. Suddenly the pension scheme became a senior management issue and this created a demand for day-to-day information in line with that provided about other balance sheet risks addressed by senior managers.

Is there a sense that technology is allowing the industry to come together in a way never seen before?

SM: Technology is definitely bridging the divide between sponsor and trustee. Progressing to a place where you have one shared risk management platform can shift the debate from one about how the numbers are produced to a more productive conversation about what we are going to do with them.

JB: This is certainly the case. Take technology providers, for instance, which are joining forces to offer better services and then providing them to advisers, sponsors and trustees to facilitate a more informed debate. A lot of the work we do is around providing sponsors and trustees with tools which allow them to recognise and understand errors inherent in their pension member data. So we've always been able to tell schemes that they have this many GMPs that are wrong or this many inaccurate pre- and post-97 splits but by working alongside risk management technology partners we can now give them a good steer as to the financial impact of those inaccuracies. And they can then make much more effective decisions off the back of this information.

BR: I think the industry as a whole is going through a period of education. For a variety of reasons, the pensions industry has gone down the route of outsourcing an awful lot of the management of risk and by doing this seems to have cultivated an environment where all the outsourced parties have different sources of information. In many respects that is where technology can shed some light, pulling together disparate sources of information and presenting it in a consolidated way so that all stakeholders can understand the key issues at play. They can then come together to find a much more effective solution.

SM: I think that for us, being able to not only view but also stress-test scheme data under different scenarios, to see the impact that small changes in assumptions or investment strategy can have on scheme liabilities has been a real eye-opener. This has allowed us to show trustees both the impact of their investments decisions or their particular stance around certain assumptions, and has also enriched our discussions with both sets of advisers.

DC: I'd rather have more people understand the complexity of the problem that we are trying to deal with and have an educated debate about which path to follow. That said, for this debate to be fruitful, it is crucial that everyone starts from the same baseline of decision making. I think one outcome of this spread of information is arguably that it gives some of the power back to the owner – the sponsor and trustee. The gearing aspect that Sankar mentions – where small changes have large implications on funding positions – has long been the concern of the professional. But because the owner now has the tools to understand the sensitivity and work out their own rules of thumb, they have the chance to think through their roles and the consequences of their roles. Essentially, we are trying to reach a compromise between trustees seeking security for their members and sponsors seeking value for their shareholders and I think acting as owners rather than relying on external parties can help this.

BR: If you're a shareholder in a company saddled with a large pension obligation you have to hope that you're right, David. Shareholders increasingly want to be better informed about pension risk and expect companies to make pension risk decisions in the same way they do decisions about other balance sheet risks. However, traditionally, we've built an environment where owners are almost sheltered from a detailed understanding of those risks. The more these issues are understood by the investor community, the more risk management of pensions will change.

David, as a consultant does it worry you at all that your role may be undermined because of this trend?

DC: Quite the reverse. The more my client, the owner, understands the issues, the more I can talk to them about the real nuances that come into play. My skill and knowledge from spending 20 years working in this industry can be applied at the sharp end of decision-making rather than be swamped by managing the sponsor-trustee compromise and a rather vague debate about whether the discount rate should be a quarter of a percent higher or lower.

Does increased availability of information require a certain "skilling-up" of the industry in order that they know how to use it?

SM: For many, pension schemes are becoming a legacy element on the balance sheet – a financial asset and liability that needs to be managed by people who really understand how this risk manifests over time. I therefore see this risk management role becoming bigger and more complex, and not just for the largest schemes. As technology proliferates, the smaller schemes will also need someone in the driving seat, or alternatively there will need to be a tooling up of the treasury or finance department to be able to use this information.

JB: On the technology side the skills are there, it is actually about having people that can get out to clients and convey the nuances of the technology. I also think scheme members are important in terms of education – there is a lot of new information being provided to scheme members through auto-enrolment and there's a bit of a concern there as to how they are going to interpret that clearly.

BR: I think you raise a good point there John about the nuances of the technology. We talk about the responsibility moving back to the owner but I don't think we envisage those people being able to manage the pension risk solely on their own – that would be tantamount to giving someone who has just got their driving license the keys to a Ferrari. I think that collectively we have a challenge and a responsibility to think about how we deliver that information and analytics as constructively as possible. Just putting it into people's hands is not necessarily the right solution.

Finally, what do you see as the obstacles to the adoption of technology?

JB: I think cost is a key barrier. There is an unwillingness to invest in technology, especially with so many companies struggling with budgets. The other is a lack of impetus, which has meant that technology has been slower getting traction than in other financial services industries.

BR: It's not just adoption of technology –the pensions industry is quite slow at making any decision, largely because there's a whole myriad of different stakeholders involved in that decision-making process. In many ways it is about being able to demonstrate the value of the technology – the pensions industry isn't set up to understand technology in its pure sense it is set up to understand value-added advice or solutions and these are being greatly enhanced by the smart use of technology.

JB: We think along the same lines – we use technology to underpin smart consulting and analytics advice. We don't ask clients to pay for pure technology but rather we ask them to pay for an enlightened view of a situation so that they can make better financial decisions.

First published 05.08.2013

Tom Strachan-McCarter