Pension funds face a lot of changes in regulation, an increasing demand for returns and a strong focus on costs. In this environment there is a drive towards a higher level of quality, efficiency and accountability. The sharing of the back office of the investment management of a pension fund is one of the possible solutions.
In the last couple of years, the world has changed significantly for pension fund managers worldwide. The enormous downfall in global equity markets during recent years, combined with the current low interest rate environment, has eroded the value of pension fund assets, and in many cases, resulting in dangerously low funding levels.
As a result, asset managers and clients now display increased cost awareness. Furthermore, current market conditions have prompted regulatory authorities to draft new regulations that are stricter and more demanding on pension funds.
To cope with the trend in this ‘new’ world, pension funds must now deliver better results on all aspects of asset management and administration. Investment strategies have become more complex as equities are no longer seen as a sure bet for the longer term; there is now a strong desire eg, for absolute return categories which have low correlations with other asset classes. At the same time back- and mid-office platforms need to deliver a better job on the timeliness and accuracy of information as well as improved system reliability. And all this, of course, at lower costs.
Many pension funds have already outsourced their asset management functions for some time by hiring external managers and will probably continue to do so in the future. More recently however, it appears that a shift towards outsourcing back- and mid-office operations is also a promising possibility.
In the Netherlands this trend is driven by three main factors:
o Regulation: A typical pension fund has to deal with several regulating authorities such as the AFM (Autoriteit Financiele Markten: similar to the SEC in the US), PVK (Pensioen- en verzekeringskamer: specifically aimed at pension funds and insurance companies) and the DNB (De Nederlandse Bank: the Central Bank). All these institutions have their own reporting requirements, including administrative organisation, employees, pension fund risk etc. Other demands from market and government include IAS1 (RJ271), IFRS2, SAS703, GIPS4, Staatsen, Tabaksblatt, etc. The larger pension funds are well equipped to cope with these requirements as they have many in-house specialists to deal with the evolving regulations and other legal developments. In contrast, smaller to middle-sized pension funds have been forced to spend more and more on costly outside expertise to cope with these new regulations.
o Clients: In addition to client (pension fund trustees) wishes to comply with regulatory requirements, there are two other factors that influence the information needs of clients:
Due to the weak investment results in recent years, the ‘search for return’ is once again at the top of clients’ agendas. Products like high yield bonds, emerging market debt, direct real estate, hedge funds, private equity etc, have become increasingly important and pension funds need to be able to cope with these types of investments, as well as the resulting portfolio administration and reporting requirements.
The need to monitor and control the different investments using tools like Value at Risk (VAR), compliance monitoring, performance attribution, etc, combined with the demand for increased timeliness and frequency of reports.
o Management: Asset management wants to be at least one step ahead of their clients, especially focussing on relevant management information to improve performance and control on investments.
Together, these three factors can significantly increase the cost of pension fund administration for these organisations.
The obvious question is therefore whether or not there is a possibility to reorganise it in a more cost-efficient way. Several third-parties currently offer partial solutions to pension funds, primarily custodian services, asset management and software development, but to-date, no comprehensive back- and mid-office solution has been available on the market.
Seizing this opportunity, our company Mn Services has entered the market with a complete and fully integrated solution, the Financial Services Provider (FSP) product. Based in Rijswijk, we are an asset management organisation originating from the third largest Dutch pension fund, with assets under management of E21bn, and have 50 years of asset management experience. In 2002, we were the very first user in the Netherlands to implement the Dimension platform, a state-of-the-art system from Simcorp.
Leveraging off our own experience of reporting on a broad array of investment categories, the efforts of implementing this system in compliance with the stringent Dutch regulatory requirements by the PVK (Pension and Insurance Chamber) and DNB (Dutch Central Bank), we have now decided to make available their back – and mid-office platform as well as reporting functionalities to other pension funds, in addition to our asset management capabilities.
What are the benefits for pension funds to outsource their back- and mid-office operations to a pension fund based asset management organisation?
o Minimal IT investments necessary: hardware, software and data providers
o Robustness and the ability to deal with complex, new regulations
o Reduced management focus
o Making use of external knowledge at relatively low price and proven quality
o Organisation that “speaks your language” literally and figuratively
o Broad functionality
o Reduced implementation time
To conclude, we believe that there is a strong case to outsource to an asset management firm that already manages money for other pension funds. At Mn Services, we believe that outsourcing the back- and mid-office operations of asset management should be performed by an experienced partner that not only understands the special needs of a pension fund and is completely on top of the Dutch regulatory environment, but also has the obligation to comply to the pension fund asset management clients.
A typical example of the effect of changes in regulation is as follows:
Since the first of May 2003, the DNB, the Central Bank, requires the larger pension funds in the Netherlands to report their holdings on a monthly basis. This is being used for the purpose of better estimating the balance of payments in Europe. The complete report consists of around 30 different types of sub-reports, particularly focussing on the differences between types of investments and residents/ non-residents. The effort to produce these reports, often supported by the custodian, has been considerable and a big distraction for many pension funds. The trends towards new asset classes (derivatives) and evolving reporting requirements will continue to impact the internal resources of any organisation. Implementing the FSP concept, however, provides one possible solution to this, ensuring that a pension fund produces a complete set of statutory reports and is able to cope with any new requirements proposed by the DNB, both efficiently and cost effectively.
Jan Bertus Molkenkamp is director account management at Mn Services in Rijswijk
1IAS: International accounting standards. Especially IAS19 (Dutch equivalent is RJ271 (RJ = richtlijn voor de jaarverslaglegging) will have considerable impact on the information needed to be provided in the financial statement.
2IFRS: International Financing Reporting Standards, IAS is part of IFRS but IFRS is much broader than the above mentioned IAS19 standard.
3SAS70: Statement of Auditing Standards focusses on the quality of the control the organisation has in place.
4GIPS: Global Investment Performance Standard endorsed by the IPC (Investement Performance Council), the global standard regarding performance composite reports.

Topics