By Matthew Seymour
The problem of meeting pension obligations has historically been considered a long-term one. Pre-crisis, it was also a relatively small one for many pension schemes, given healthy funding statuses propped up by booming financial markets.
Schemes relied on paper- and spreadsheet-based reporting methods to manage risk and define investment strategies, normally on a quarterly or annual basis. More often than not, these systems were built in-house by non-technologists in consultancies or investment firms, where the focus was purely on the numbers rather than the technology used to deliver them. As there was little demand for regularly updated information, there simply wasn’t enough impetus to alter the status quo.
This changed when the global financial crisis hit and billions of dollars were wiped off the value of global pension scheme assets, before most could act. It became clear that while it may be a long-term problem, it could have far more immediate consequences. Schemes therefore needed to be able to manage risk more carefully and this required more immediate information. Out-dated systems requiring significant manual effort, which provided information on an infrequent basis, were no longer good enough.
The industry therefore opened its mind to technology. Schemes began to leverage on-demand, real-time information in order to drive a better understanding of their funding position and sensitivity to market and demographic factors. Consultancies meanwhile became more open to the idea of utilising specialist financial technology solutions, scaling their businesses so that the focus is instead on the elements of their work that are most valuable to clients – namely, providing advice and solutions – rather than number-crunching. Specialist financial technology firms have subsequently leapt into the gap.
Technology is changing the game, but we’ve only just scratched the surface of what it can do for the pensions industry. While it has driven a step-change in the approach to risk management, its impact has largely been siloed. Trustees, sponsors, consultancies, investment managers and other stakeholders often have their own systems, processes and sources of data. As such, the industry is still some way off using the internet to its full potential in terms of aggregating and collating these different sources of information and making this valuable information available to relevant parties. But progress is being made, and I have no doubt that technology will establish a “network effect” and allow intermediaries and stakeholders involved within a scheme to work together in a more fluid way.
Indeed, other financial services industries are learning from the advances in social media in this respect. Take Saxo Bank’s social trading platform – dubbed the “Facebook for Finance” – for instance, which works on the concept that investment performance can be improved by capturing the knowledge of tens of thousands of individuals, rather than relying on a few. While the pensions industry may not need the wisdom of crowds, it is clear that it could benefit from the internet’s ability to instill greater connectivity and collaboration of stakeholders and intermediaries involved in decision-making processes.
Whether one system prevails or we see individual systems interact via a “common language” is very much up for debate. But what we are likely to see is technology in some way connecting up all of the market participants within the institutional investment arena to allow them to benefit from the latest advancements and work together more seamlessly for the better of the investor and, ultimately, the members.
Matthew Seymour is managing director at RiskFirst
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