NEW YORK – August 7, 2013 – America’s pension tension is increasingly a front-page story. Underfunded pensions across the country are closely watching the actions of the state of Illinois and the battle taking place over Detroit’s pension obligations to see whether they can legally reduce their own formerly guaranteed benefits. According to a recent report by the Pew Center, 61 key cities across America—the most populous one in each state plus all others with more than 500,000 people—are facing a $217 billion gap between what is promised to retirees and what they have saved to pay that bill.
Pundits are quick to offer solutions ranging from mandate overhauls to defined-contribution pensions systems to privatization. Unfortunately, the role that technology plays in the success of these pension portfolios gets little to no attention. While typewriters, walkmans and VHS tapes have long been left behind, millions if not billions in pension assets are still managed on legacy systems that existed before Windows 1.0.
The inherent characteristics of these legacy technology systems are major detriments to a pension fund’s performance. This is especially true today as underfunded pensions seek higher investment returns in hopes of outpacing, or at least meeting, their liabilities through the increasing use of new asset classes like over-the-counter (OTC) derivatives. Such systems are just not equipped to manage the complexities and accompanying risks and regulatory requirements of these types of investments and deliver the enterprise-wide view required for accurate decision-making. Although these are back-office systems, the consequences for the entire organization are far-reaching.
A recent study by SimCorp, a leading provider of investment management solutions and services for the global financial services industry, shows that 40% of pension and other buy-side executives make critical decisions based on poor quality data. And yet, frustratingly, another survey found that almost 35% of respondents have no immediate plans to make technology improvements in the back-office.
Another study from SimCorp StrategyLab, a private research institution sponsored by SimCorp, concludes the resource burden of inefficient processes and manual workarounds may hinder buy-side growth. The study suggests that investment managers running on legacy systems should act now to be better prepared for growth.
State-of-the art technology can make a difference. With the amount of investment knowledge doubling every four years, firms should not rely on technology that may be decades old. Taking on a modernized IT system is an exercise in risk mitigation and also growth. In today’s IT-driven world, technology is a powerful enabler to drive alpha. In fact, studies show that operational efficiency directly contributes to investment performance.
A proactive, forward-thinking approach when it comes to technology puts pension firms in a position of growth for years to come. How? Such thinking can spur the adoption of an investment book of record (IBOR) to serve as a single source of truth from the front- to back-office, lead to embracing regulatory reform and reveal the importance of portfolio accounting.
Interestingly, Canadian pension funds are in a significantly better position than their U.S. counterparts. One differentiating factor has been how these funds have been much quicker to adopt state-of-the-art technology to support their investment programs.
In a June aiCIO article which describes OTPP as “the best pension plan investor in the world over the past 10 years,” CEO Jim Leech cites innovation as a reason for the fund’s strong returns. As Leech explains, “We were the first to get into derivatives, swaps, infrastructure, and private equity on our own – and I don’t mean just the first Canadians.”
A recent cover story from The Economist chronicling America’s “pensions nightmare” describes Detroit as “a flashing warning light on America’s fiscal dashboard.” Technology is not the entire answer for America’s pension woes. Still, U.S. managers are wise to wake up and look north for proof that it is a part of the solution, especially as funding gaps widen and many implement new investment strategies in an effort to remain solvent. Pension funds must equip themselves with state-of-the-art systems. These new solutions must be nimble and broad enough to enter new markets and asset classes, cope with risk and regulatory demands and ultimately, deliver operational efficiencies that drive investment performance. American pensioners are relying on it.
By David Kubersky, Managing Director of SimCorp North America
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Since 1971, SimCorp has been providing investment and portfolio management software and services to the world’s leading investment managers, asset managers, fund managers, fund administrators, pension funds, insurance funds and wealth managers. SimCorp’s world-class software provides global financial organizations with the tools they need to mitigate risk, reduce cost and enable growth. SimCorp is a global company, regionally covering all of Europe, North America and Asia Pacific. Listed on the NASDAQ OMX Copenhagen, SimCorp is dedicated to supporting the global investment management industry, its clients and its investors.
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Enquiries regarding this announcement should be addressed to:
Susan Peter, SimCorp North America (+ 1 917 546 4654+ 1 917 546 4654)
Kevin Maher/Angela Byrne
646 395 6300646 395 6300