Pension Technology in Spotlight

Terry Flanagan

Institutional pensions face some major issues, chief among them funding shortfalls and the quest to meet return targets amid persistently low bond yields. A more under-the-radar concern is the hardware, software and technological infrastructure that may have fallen behind today’s standards.

Technology has evolved rapidly over the past decade or so, and more recently, the U.S. Securities and Exchange Commission and other financial regulators have proposed or implemented new sets of rules aimed at boosting transparency and ensuring stability of markets. The redrawn landscape is challenging enough for private institutions and can be even more so for public institutions that may have much smaller operating budgets.

“The role that technology plays in the success of these pension portfolios gets little to no attention,” said David Kubersky, managing director of SimCorp North America, in a report. “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,” Kubersky continued. “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.”

About two of every five executives at pensions and other institutional investors make decisions based on poor-quality data, according to a recent SimCorp survey. About a third of survey respondents reported no immediate plans to upgrade back-office technology.

“With the amount of investment knowledge doubling every four years, firms should not rely on technology that may be decades old,” Kubersky said. “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.”

Canadian pension funds generally have more up-to-date technology than their U.S. counterparts, according to Kubersky. He specifically cited Ontario Teachers’ Pension Plan, the Canada Pension Plan Investment Board, and the Healthcare of Ontario Pension Plan as having strong technological systems.

While technological obsolescence doesn’t garner headlines the way multi-billion-dollar funding shortfalls do, the implications are significant. “Although these are back-office systems, the consequences for the entire organization are far-reaching,” Kubersky said.

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