It was more than two years ago that HypoVereinsbank, the second largest German retail bank, decided to strengthen its position in the pensions area. This was a brave move at the time, as for decades pensions had been a stronghold of the insurance industry, protected by tax regulations that provided a much more favourable framework for life assurance policies than for most other types of savings. However, with the public pension provision coming under increasing pressure, legislative changes were about to come, and there were people with a vision at thebank who were able to convince it to make this move.
These changes included a legal framework for so-called ‘Pensionsfonds’, a type of vehicle completely new to the German pensions market. At a first glance, it has a lot of similarities with a specialised insurance company, as it mainly provides annuity pensions, a type of benefit common to the German insurance industry. But looking at the investment side, the picture changes. While insurance companies have their strict legal regulations regarding investments for traditionally calculated insurance products, Pensionsfonds have much more freedom, which allows them almost any high quality investment portfolio as long as it is covered by the prudent man rule. So this seemed to be an ideal vehicle for the next step into the pension market as it was much closer to an investment product for which the bank has an excellent reputation.
However, being a bank, there was nothing similar to an insurance-style administration system to build upon. Hence it was clear right from the start that setting up a pension vehicle would require a completely new system. This was not just a challenge, but also a big opportunity as a new system can be built without the strategic plans being compromised by the existing system and its limitations. Therefore the first step towards the new system was the definition of the strategic principles to which the new system had to respond:
We were keen to be a first mover in the new pension fund market. There was a new market to be shared among those who were quick enough to bring intelligent new pension solutions in the new style.
It was obvious that the new legislation that became effective at the beginning of 2002 was not the last change in the pension area. Given the size of the problems that the public pension scheme encountered, the first step towards a pension system with a stronger fund-backed pillar was somewhat haphazardly. This and the European pension fund principles that were already under discussion at that time made it very likely that there were more legal changes to come in the foreseeable future.
Consumers are getting more and more aware of the performance of their investments, and costs are a major factor in determining the final yield of a long-term pension contract. This is even more true in times when investment yields are expected to be rather lower than in previous years. Therefore the sales and administration process had to be as effective as possible to be able to provide competitive pension solutions.
Just being cost effective is not enough for the administration. The target was to provide good service to the customers, the companies setting up their pension schemes with the pension fund as well as the individual members. This was to be achieved by processes that need as little paperwork as possible and information being available to the customers 24 hours online a day.
Looking back at the products in the pension and insurance market over recent years, there was almost only one continuous factor: change. So it was deemed to be essential for the mid- and long-term success of the new company that it would be able to tailor products to suit the needs of specific target groups and to market completely new products in a timely manner.
Although the pension fund was the first target, there are more legal types of pension products, and the option to move into these other pension types was to be left available.
As pensions are a fast growing market, there would be more and more companies entering it, many of those without the core expertise or system to administer pension schemes. Hence it was the target to be able to offer such companies a system and the related administrative services.
As a bank, we have a strong position not only within Germany, and many international customers. Adding the upcoming European legislation for a common pension market, it was clear that the business has the option to grow beyond the national borders.
From these guiding business principles the following requirements for the system were derived:
The system should be up and running within a short timeframe. Therefore the IT market was scanned for components available to cover the needs, rather than looking for a complete in-house system development from scratch.
Furthermore, these components had to be usable internationally to keep the road open towards other European countries. For specific national requirements, a modular approach was needed to be able to replace such components when moving to other countries.
The system should be able to efficiently cope with changing legal frameworks and changing consumer demands regarding products. Hence the system needs to be strongly parameter driven.
To handle the administration of company pensions cost-effectively, the system had to provide comprehensive functionality for bulk transactions like upload of employee data as delivered by the companies.
The system must be able to administer the business of multiple independent pension companies in parallel in a way that allows easy access to all the data from a uniform user interface.
To allow the companies and their employees to get information about their contracts anytime, the system had to be prepared technically to be tied into the internet.
After a thorough investigation of the systems available in the market the decision was taken for a platform which was already used for a number of pension systems in different European countries, comprising features like multi-currency and multi-language support. This ensures that the system is ‘Europe-proof’, and that changes in the European legislation will be incorporated on a cost-effective basis. An integral element of the system is the product workbench that allows rapid implementation of product modifications and new products. Also important was the modern technical platform of the system which from a pure technical standpoint allows all transactions to be processed in a client/server environment as well as via the internet.
The administration engine is already capable of dealing with contributions for the same employee being paid under different sets of taxation and state benefit rules. The system is keeping these different contribution types and the related investment in separate pots. We see this as a function needed in many countries, so it is part of the generic administration engine. However, once benefits are paid from these pots, the actual taxation is done according to national rules, so in the system it is performed by a module covering the specific German tax rules. The general ledger functionality is also covered by a specific module. These components are surrounded by generic infrastructure components for printing, an optical archive, a banking interface for payment processing in the German banking system, etc.

A graphical representation of the system structure is shown in the figure. The selection of best practice components resulted in a system that was much quicker to implement than it would have been possible by developing a home-grown system. The modular approach also allows for replacing national components like the taxation module without destroying the system architecture. This will make it easier to transport the system into other countries.
The system is used in production for two pension funds, the HVB Pensionsfonds and the Chemie Pensionsfonds, so the multi-company option is already being used. The latter was the first pension fund which obtained its licence from the authorities. The system is enhanced with further functionality and an interactive internet component is planned to be launched in summer. Among the next activities is also the introduction of a new defined benefit product to broaden the offering of both pension funds.
HVB Pensionsfonds is also currently in discussion with a series of companies who want to enter the pension market or want to broaden their offerings in this area. Some of these companies have their own product ideas, but others are looking for more than just a third-party administration service. They want to build on the products HVB Pensionsfonds developed, and add individual elements to suit their objectives. These elements can range from design changes of the contract documents to show their own corporate design to their customers, to specific investment instruments to be used for the asset allocation. For these HVB Pensionsfonds acts as a provider of white label products. So the strategic idea of setting up not just a pension fund but a ‘pension factory’ really starts to pay out!
Martin Grossman is a director of HVB Pensionfonds in Munich

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