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Pension funds in Asia Pacific: Saying yes to innovation? Here’s how

Industry trends such as insourcing, AI, increased technological and asset complexity suggests a need for adopting innovative technology platforms to prepare organizations for future growth and competitiveness.

The pension fund industry across the Asia Pacific region has seen significant developments in the past two years. More and more organizations– despite their sizes and geographical locations – have unveiled ambitious programs of change, displaying their willingness to step out of the comfort zone of their domestic markets. Concentrated exposure from a focus on domestic assets, a narrow investment opportunity set, and the need to boost returns are pushing many to think creatively and also look at the globe as a whole.

Australia, one of the most advanced superannuation markets in Asia Pacific, is a good example of this shift. Even though a great proportion of assets are still invested in the domestic markets, the nation is increasingly reducing its home-bias and looking outside of its borders for new investments. According to data from Australia Bureau of Statistics, as of 31 December 2017, the nation saw a 4% increase on-quarter in overseas assets alone.

This shift has also been spreading to other conservative and disparate places in Asia as well. Japan, home to the world’s largest pension fund, has slashed its largest holding of domestic bonds by almost half in the past few years in favor of overseas assets. The region’s emerging markets such as Thailand and Malaysia are also following suit.

Meanwhile, Asia Pacific also accounts for the fastest aging population and a rapidly declining old-age support ratio, giving the region limited time and opportunity to address the needs of their retirees. According to a United Nation’s report1, it took France and Sweden 115 years and 85 years respectively to move from an ageing to an aged society. China is expected to fill the gap in 25 years, Thailand in 22 years and Vietnam in only 19 years. Time is of the essence.

This leads to another significant development in the region: pension funds are accumulating fast in some of the largest markets which demands a more comprehensive and efficient pension system. The 20-year growth in superannuation assets in Australia has been 12.1% p.a.2. Elsewhere, China is expected to attract net new inflows of 15% per year through 20253. This is double the rate at which assets for the largest 22 pension funds globally have been growing in the last two decades. With this in mind, asset owners such as pensions and insurers in China are set to become the largest players in the industry.

Other powerful forces – including advanced technology, new regulations and changed governance structures – are also currently reshaping the landscape for pension funds in our region. Evidently, investing in technological development is a good opportunity for pension funds to refocus on core competencies, reduce system complexity and lower operational risks. There is still a lot of room for improvement as a study by Willis Towers Watson in Feb 2018 revealed that the adoption of new technologies among Asian pension funds has been surprisingly low for the last 20 years.

There is, however, a good indication of the much-needed change. The renewed focus on technology and the intense search for tech talent at the highest levels show a brighter picture of things to come. In addition, several industry trends suggest the need for adopting innovative technology platforms to prepare organizations for future growth and competitiveness:

Insourcing: focusing on the strengths within

A number of superannuation funds in Australia have responded to the challenge by bringing assets in-house. The Asian Investor highlighted the industry shift to insourcing that took off a few years ago and has shown no signs of slowing down.4

AustralianSuper plans to raise the proportion of assets it manages internally to 50% from 30% by 2023. Meanwhile, FirstStateSuper indicated their intention to increase the assets they manage internally – another step forward for this industry following the State Plus acquisition in 20165. And UniSuper, also a strong believer in managing assets themselves, has almost 50% of assets in-house today.6

We are also seeing an increasing number of pension funds in the region showing interest in having control of critical data and plan to bring more assets in-house as part of their expansion and diversification strategies. This trend, along with regulatory changes that demand for better transparency and more detailed disclosure of underlying holdings, is driving new technology adoption in the pension funds industry. 

Naturally, as pension funds get deeper into more complex asset classes and increasing volumes of data, they will require more powerful investment technologies. Existing operating models need to be reviewed:

  • Best of breed systems/point solutions, still prevalent in the industry, need to be consolidated;
  • The traditional method of combining point solutions with aging custodial technology can no longer keep up with the increasing demand for real-time data and analytics;
  • Many traditional outsourcing providers are not able to deliver timely change, support new instruments and markets/data consolidation needs;
  • As institutions continue to grow, data should be at the heart of the organization’s strategy. Data is intellectual property that needs to be protected and channeled to support good investments. We will need better, faster, more comprehensive information than our competitors to be ahead of the curve.

Cutting through complexity with technology

As pension funds broaden their scope into more complex asset classes such as alternatives (predicted to double in size, to about USD 15 trillion by the year 2020), their governance difficulties, complex data sets and increasing regulations demand more transparency and agility.

It is clear that many pension funds are not fully equipped to deal with that kind of complexity. The multiplicity of systems, spreadsheets, disparity of data sources such as those provided by external fund managers/custodians and the duplication of tasks in their current platforms cannot efficiently accommodate new asset classes, new tax/accounting standards, reporting requirements and higher transaction volumes without incurring a myriad of extra costs.

A report by the TABB Group on front office trading technology, Breaking Down Buy-Side Barriers: Achieving Alpha Through Agility points out the inefficiencies of the fragmented investment platform that force front and mid-office staff to spend precious hours in a day manually identifying, investigating and resolving discrepancies and errors. This highlights the operational cost or shared cost of poor reconciliation on top of the equally important cost of lost opportunity of a good investment decision.

Simplifying complex assets with system consolidation

Alternative investments have been traditionally managed more or less independently from the rest of the portfolio given the promise of a non-correlated superior risk-adjusted return and long-term sustainable cash flows. However, alternatives should, as all other investments, be viewed in a holistic portfolio perspective to gauge correlations, exposures, concentration risks and overall expected returns. System consolidation provides the much-needed consolidated view of risks and exposure across the portfolio.

In fact, there has been a significant drive in our industry towards achieving operational efficiency by managing all assets on a consolidated investment platform architecture and utilizing increased automation. This is not just an effort to attain economies of scale and realize strategies for growth across geographies and capabilities; it is also a key component in risk mitigation, error reduction, and wider compliance.

Future outlook

While there is still a wide disparity in terms of pension fund models and economic development across Asia Pacific, as more organizations, large and small, emerge out of their status-quo and prove successful, others will inevitably follow.

Some pension funds in the region are already following in the footsteps of their global peers in diversification and alternatives. Now they need to take the extra step of modernizing their technology to remain relevant and competitive in an environment that permits disruptive technology and innovation.

It is clear that only those with the ability to innovate and instill best practices will be around many years from now to continue building the much-needed safety net for their retirees.

1. ESCAP calculations based upon Kinsella and Gist (1995); UN Census Bureau (2005); and Vietnam GSO(2010)

2. Global Pension Asset Study – 2018 by Willis Towers Watson

3. Leadership in Times of plenty, ‘Future winners in China’s asset management industry.’ Casey Quirk by Deloitte

4. Asset owners seen insourcing to cut costs. The Asian Investor/Sept 9th, 2016.

5. Investing with Scale – First State CIO on State Plus acquisition

6. The Asian Investor/Feb & Mar 2018 Magazine; “Asia Pacific’s leading pension fund employees”