Working toward an integrated pension industry network

The pension management industry has undergone a technological revolution, moving away from paper- and spreadsheet-based reporting to embrace web-based solutions. But it has only just scratched the surface of what technology can do. The next step is to leverage the Internet to improve collaboration of pension executives and their service providers to combine efficiently their respective sets of analytics to improve decision-making.

The global financial crisis has been the most notable recent catalyst for change in the pensions industry. The crisis — and ensuing downside market volatility — knocked billions of dollars off the value of assets of global pension plans before many could act. Once bitten, plan executives quickly became mindful of the need to manage risk more carefully. It was evident that waiting several days or weeks for information from investment managers, investment consultants, actuarial consultants and custodians was simply not a viable option, especially with funding levels having the potential to swing significantly while information to make a decision was prepared. Even though pension plans work on long-term horizon from an investment perspective, certain critical events need to be addressed rapidly to maximize benefits and minimize losses.

The result is that much of the industry is embracing web-based applications, allowing them to far better understand — and in real time — funding positions and sensitivities to market conditions.

Undoubtedly, the past 10 years have seen a fundamental change in the industry's approach to technology — with plans and consultants becoming far more open-minded in terms of the role technology can play, and from where it should be sourced; in particular by embracing products and services of specialist technology providers.

Indeed, one of the key historical barriers to pension technology emerging and evolving was the fact that consultants had legacy in-house systems to which they were wedded and had no incentive to update. Built by non-technologists and not leveraging the latest technological advances, they were unable to deliver a step-change in improvement to the industry. Indeed, often these systems were no more technical than spreadsheet-based systems for asset and liability valuation. The focus for many was simply on doing the minimum necessary to protect market share, albeit with antiquated systems.

But that is undergoing a transformation. Today, investment-related intermediaries scale their businesses in different ways, focusing on the elements of their work that are truly most valuable to clients — namely, providing advice and solutions — rather than number crunching. They are becoming far more willing to outsource the development of technology to experts in the field. The investment side of pension funds — investment consultants and investment managers — in particular, is embracing this model with the most energy. This acceptance is, in part, the result of the uptick in plan interest in derisking in the current economic environment and the need to better understand and explain the cross balance-sheet view of their clients' portfolios.

The upshot of this is that technology has assisted the evolution of optimal derisking strategies. Trigger-based derisking, for instance, is nigh on impossible to execute for a large number of plans without a system that can monitor funding levels and market factors across all of them in near real time. Liability-driven investing and glidepath strategies are also becoming more prevalent and more effective. Technology is changing the game.

But we've only just scratched the surface of what technology can do for the pensions industry. Speaking to consultants, asset managers and pension plan executives, I'm seeing increasing credence given to the idea of the “network effect”, where technology allows intermediaries and stakeholders involved with a plan to work together in a more fluid way to provide a better result for the pension plan.

It is fair to say that while technology has undoubtedly helped improve understanding of risk, it has largely been siloed, with each piece of information being isolated to the creator. 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 has unintentionally cultivated an environment in which many consultants and asset managers have their own systems, processes and sources of data. This detached approach is especially the case in the U.S. market, where the intermediary space is very fragmented and often specialized.

Other financial services industries are learning from the advances in social media in this respect and the concept that investment performance can be improved by capturing the knowledge of tens of thousands of individuals, rather than relying on a few (social trading platforms, for instance).

While the pensions and investment industry might not need the wisdom of crowds, it is clear that it could benefit from improved performance provided by the Internet's ability to instill greater connectivity and collaboration of stakeholders and intermediaries involved in decision-making processes. Asset managers would be able to structure better matched portfolios if they were able to gain direct access to the right portion of liabilities, modeled in detail, directly from the system in which the actuary calculated them. Likewise, custodians could provide detailed asset information on the current holdings of a pension plan to advisers to assist them in providing accurate guidance.

Enabling this connectivity could also be helped by a shift in the mindset of the industry — and in particular that of intermediaries, such as investment managers, investment consultants and actuarial consultants — to become more open to the concept of sharing information with each other, opening up their systems in order that they can all coordinate their efforts and do so in real time.

Looking ahead, the establishment of a “network effect” will allow all stakeholders in the investment management arena to benefit from the latest advancements and work together more seamlessly for the betterment of the pension investments and, ultimately, the plan participants. Here's to the future. It's bright and connected.

Matthew Seymour is the London-based managing director of RiskFirst, which provides risk analytics to the pension and investment market, including in the U.K. and U.S.