Pension executives are concerned that some of their global custodians and mutual funds or their suppliers might not solve their year 2000 problems by the deadline, or won't have time to thoroughly test the solution even if they meet the deadline.
Although the deadline for a fool-proof fix is almost two years away, many custodians and mutual funds report they will be testing how their software will interact with vendors, clients and others right up to the millennium.
"There is a fear out there that for some (providers), it's too late," said one pension fund adviser, who asked not to be identified.
Previously, it had been thought that, while banks and insurance companies would spend gobs of money, they wouldn't have any trouble eradicating the year 2000 bug in time.
One pension fund that sees itself in potential jeopardy is the $124 billion California Public Employees' Retirement System, Sacramento. CalPERS "may be at risk" because of problems with the fund's vendors, a new staff report states.
A key CalPERS vendor is State Street Bank & Trust Co., Boston, the fund's global custodian.
"If (State Street Bank) or their subcustodian banking network were unable to continue providing services due to Y2K problems, CalPERS may be unable to invest and access funds through (State Street) after the year 2000," the CalPERS report states. (Y2K is commonly used shorthand for the year 2000 problem).
John O'Donnell, senior vice president responsible for State Street's Global Network computing service, said State Street will complete testing, possibly ahead of schedule, in 1999, and expects to have its systems and those of its subcustodians and vendors working properly before 2000.
State Street officials estimate the bank will spend $95 million to $100 million fixing and testing in preparation for Y2K.
Meanwhile, Barry Cope, manager of trust investments at National Gas Fuel Co., Buffalo, N.Y., said he intends to contact his money managers, custodian and other service suppliers to determine how they are dealing with Y2K.
His $500 million plan depends on Mellon Trust, Boston, for trust and custody services. Until recently, Mr. Cope was spending full time in the internal auditing department of Natural Gas. He said the Y2K issue is a "hot topic" there.
Donna Kling, a pension consultant in the Pittsburgh office of Wilshire Associates, Santa Monica, Calif., said Wilshire has notified its pension clients about potential Y2K problems. She said Wilshire is encouraging pension funds to quiz their vendors to determine how they are solving them.
But, she said, she suspects Y2K concerns will become significantly more pressing in the months ahead.
And officials for the $200 billion Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York, announced Jan. 23 TIAA-CREF will be querying all of its vendors about how and when they will solve any Y2K problems. TIAA-CREF has put together a team to certify all vendor applications by the end of this year, but officials acknowledge they have no guarantees their vendors will be ready for testing then.
Officials said they want to identify organizations TIAA-CREF uses that might not resolve problems by 2000.
Danger ahead
Custodians and mutual funds see Y2K as an extreme danger to their operations, and plan to spends hundreds of millions of dollars to avert problems.
The issue is now the highest priority of top management, bank custody and mutual fund executives say.
Peers of State Street describe the bank as one of the world's most technologically advanced. That State Street is still wrestling with the problem raises questions in some minds about where other banks stand in solving their Y2K problem. Other leading banks expected to complete Y2K testing in 1999 include: Northern Trust, Chicago; Mellon Bank, Pittsburgh; and First Union Corp., Charlotte, N.C.
Other custody banks still working to resolve Y2K include Bankers Trust Co., New York; Brown Brothers Harriman & Co., New York; The Chase Manhattan Bank, New York; Investors Fiduciary Trust Co., Kansas City, Mo.; Morgan Stanley Global Custody, Brooklyn, N.Y.; PNC Bank, Lester, Penn.; and UMB Bank, Kansas City, Mo., according to a recent survey of custodians by the financial services research firm DALBAR Inc., Boston. Officials at those banks couldn't be reached for comment.
While custodians are the crucial link in tracking and safekeeping of tens of billions of dollars in assets around the globe, mutual funds that invest for 401(k) plans present another concern to pension funds.
Leading mutual funds such as Putnam Investments, Boston; Vanguard Group, Valley Forge, Pa.; John Hancock Funds, Boston; and Fidelity Investments, Boston, report they expect to have all software systems tested and working before or by the end of 1999.
They expect to fix their internal systems and begin testing by the end of 1998.
However, computer experts say a year of testing is needed, particularly with fund suppliers, and is the most important part of a clean bill of health for Y2K fixes. Yet most leading mutual fund companies will be testing well into 1999.
Problems sound simple
Y2K problems sound simple at first. Old computer software set aside only two spaces, called date fields, for year identification in computer code. When the year 2000 arrives, old code can identify 2000 as 1900 and send out wrong information to new computer code.
According to computer experts, the Y2K problem can spread like an infection. Wrong information from old code is fed to millions of lines of new code from millions of lines of old code.
The wrong information can come not only from computer code within a firm, but also from any of its hundreds of vendors or partners.
A giant like State Street has 600 vendors with 3,200 products, bank officials say. It also has 91 subcustodian banks operating in 78 countries. State Street plans to test and monitor the information from every vendor and subcustodian bank.
Other big custody banks face the same problems.
At mutual fund giant Putnam Investments, executives saw the Y2K problem as so potentially financially injurious that they launched a companywide effort to solve it more than three years ago, said Gavan Taylor, chief information officer.
An important break for Putnam is that its computer processing operation is centralized in Boston. For large, decentralized mutual funds, the Y2K problem must be a "nightmare," he said.
Y2K's threat to a major mutual fund includes "putting (them) out of business," Mr. Taylor said. Y2K has the potential to "blow up" mutual fund software systems.
Unless software programming is properly fixed, mutual funds might not be able to process purchases or liquidations of mutual fund shares or send cut client statements, among other problems, in 2000, Mr. Taylor said.
Warning to late starters
More severe and financially damaging problems threaten mutual funds that fix - but start late on solving - Y2K problems, Mr. Taylor said. The shortage of computer programmers is expected to worsen next year. Computer consultants will charge mutual funds "exorbitant rates," he said.
Bill Imhof, a practicing director with financial services firm Alliance for Fiduciary Consultants, Parsippany, N.J., said he has heard reports that some computer consultants are going to high schools and colleges looking for bright students with strong computer skills. Salaries to be offered will top $50,000, he said.
The cost of catching up on Y2K fixes may be devastating for mutual funds that need to update product offerings to stay competitive, Mr. Taylor said.
Mutual funds face double jeopardy: They have to fix their own problems, and they must monitor problems of the custody banks they use.
Y2K repairs at most mutual funds are thought to be running at 30% of firms' entire information technology department budgets, said Carol Dow, a senior vice president at Vanguard responsible for its Y2K repair effort. However, she said, at Vanguard the cost is running at 10% of the budget. She declined to specify the dollar amount.
Costs for repairs could be higher than expected at some operations. Even when main corporate computer systems are partially rewritten or replaced and tested, the Y2K bug can show itself again, Mr. Imhof said.
He said some traders, for example, could write small computer programs, called subroutines, for Excel spreadsheets and use two instead of four space date fields. Those potentially infectious programs could lurk in desktop computers, unbeknownst to corporate information technologists, ready to feed bad information into repaired code.
Another concern, he said, is that a year of testing is adequate only if a company fixes Y2K problems by the end of this year.
But if corporate executives took shortcuts in making code repairs, they might not have enough time to redo repairs that subsequent testing shows are needed, Mr. Imhof said. "Some people are going to fall short."
