It all adds up

As anyone who queued up to get their hands on the new Apple iPhone last week can attest, keeping up with the latest technology promises to make life easier, but these improvements come at a cost.

Pensions technology is no different. Once upon a time most schemes used a simple database, required to do little more than keep a record of members’ details. But as the nature of occupational pension schemes has changed over time, so has the technology available to deal with it.

Ask a random selection of software providers what the key change spearheading development today and most will answer straight-through processing. STP allows the automation of data collection, the trapping of errors based on pre-determined rules and ensures the appropriate processes are followed both in terms of the scheme and legislative rules.

Modern systems can go beyond this by including comprehensive data analysis and error handling routines which can systematically correct data thus improving its accuracy going forward. This supports recent changes to tighten the rules on holding of data. Advancements in workflow technology and reporting mean workload balancing can also be improved to better enable the better achievement of service level agreements and legislative timescales.

But providers are quick to stress that STP is not the answer to good old fashioned human error.

Aviary managing director Steve Bird says: “Human error is the easy description, however, the old adage of ‘rubbish in… rubbish out’ still exists. Therefore STP needs to validate the data entry against a known set of rules which can then ensure that any exceptions are highlighted at the point of data entry, not at the reporting stage. The key value of STP seen with this caveat is data integrity. There is real economic value to having accurate management information.”

Xafinity Claybrook’s sales and marketing director Mark Ellis agrees.

He says: “Clearly time saving and reduced risk where compliance is concerned is of great benefit to schemes, in addition to improved accuracy. With less time to spend on the more straight-forward processing elements of pensions administration, administrators can dedicate more time to the service offered to their end user.

“STP initiatives such as the Investment Manager Straight-through-processing Development Group whose aim is to define a protocol to interface data about investment trades, receiving pricing and feeds and statements of holding for reconciliation purposes, extends this further. Initiatives such as this can ensure the information used in pensions processing is more up to date and accurate which is becoming increasingly important when members and trustees are viewing information over the web.”

But while the administration technology used by schemes has moved along at a rattling pace over the last 10 years, the functionality at the heart of the system has long remained the same – to hold the appropriate data, calculate pension benefits and in doing so meet the scheme and legislative rules of the moment.

Ellis believes where technology can be harnessed to further benefit its users is around how it can make these core requirements easier and quicker to achieve, in a more accurate fashion to reduce risk.

He says: “Over the last 12 months pensions software has continued to make strides in a number of key areas to benefit both members and trustees. For example, scheme governance is being made easier through the increased accessibility of information for trustees. The use of straight-through processing or workflow technology means, as well as improving the timeliness and accuracy of work within a department, it can also be easily reported to meet legislative requirements.

“This information can be deployed in a user-friendly manner across the web so trustees and pensions managers can keep well informed [for example] about the compliance of their scheme, investment allocation choices and levels of funding. Although an ongoing theme for some years, member communication has moved further forward as a means by which to inform and educate through the use of member specific investment modeling tools for example.

“The demand for pensions software to integrate with industry standard technology platforms [such as workflow solutions and portals] has increased from third-party users. Corporate users however have found the option of software suppliers hosting the core system themselves, in an ASP type offering, more attractive to reduce support and maintenance overheads. This is supported by the use of web enabled pensions software systems.”

Web-based access has indeed become the standard for occupational schemes, whether members appreciate it or not. The web is now the dominant method of communication for most businesses and, increasingly, for most people. As a result, systems designed to make best use of the internet are seen as essential to any pensions administration system.

This is especially true of defined contribution schemes, which require far more day-to-day involvement from the member than defined benefit funds. DC scheme members cannot be expected to work out for themselves the likely income their investment decisions will make, so it is essential to provide them with tools enabling them to understand the implications of their decisions.

However, the importance of the web should not be overstated, says TerraNua’s director of product management and new business, Mark Keenan.

Keenan adds: “While the web is quite important, it should not really be seen as the core of a pension administration system. Rather, a flexible and effective data model populated with good quality data should be at the core. Web solutions are just one of several enabling technologies which surround this core along with other systems such as workflow, calculations, reporting, document production and content management.

“That said, web functionality is extremely beneficial as it can increase the availability of data and processes to members through self service and make a huge impact on lowering administration costs and increasing the overall empowered experience the member has. Where members have few if any decisions to take, then web-based functionality is less essential.”

As pensions administration heads further into the realm of online services and systems, the issue of data and system security becomes more pressing. Last year, IT specialist Atos Consulting commented in Professional Pensions that schemes were “sitting ducks” for the new breed of threats from system hackers. This was blamed on the popularity of outsourcing and unbundling services which create long, fragmented chains of interfaces between outsourcers and internal operations.

Atos Consulting’s financial services security head Steven Heaney says: “We do not want to be unduly alarmist, but in some ways any system is only as good as its weakest link. One of the challenges the pensions industry has, be it defined benefit or defined contribution, is that there are many links in this chain. It is a long and complex one, and it is also very different in many different situations.”

Heaney continues: “There is a desire from schemes to connect more directly with their users – that is an aspect of business agility. But they also manage a lot of user identities in the back of the systems, whether they be fund managers, admin functions that have been outsourced, or trustees and the funds themselves. There are a lot of interfaces into the systems and a lot of fluidity in terms the identities of individuals.

“The flipside is that there is an evolution in the threats we are seeing. We have gone from the point where we had curious hackers, shall we say, to malicious hackers. Currently, we are seeing a lot of cyber crime activity, which is clearly people trying to exploit systems for financial gain. Further out into the future we foresee aspects of information warfare as well: disruptive hacking, essentially, where individuals are trying to bring down systems and markets to further their agenda.”

However, Chambers Towns-end Consultancy managing director Nigel Chambers is quick to point out that pension system security should be no different from any other.

He says: “Where banks and governments are happy to tread, surely the pensions industry can follow. No system can be 100pc secure, however all the techniques which people regularly use for other business and personal purposes are now available within pensions administration systems.”

Despite the exciting capabili-ties being made available by the leaps and bounds being made by system providers, you will not always find the fruits of their labour at work at the heart of schemes. The pensions industry has traditionally been slow to adopt new technology and has generally been anywhere between five and 10 years behind the cutting edge.

Pension schemes are, by their very nature, often risk averse, and many trustees shy away from being seen as the first to implement new technology. As in all areas of technology, trustees are also aware that the pace of change is fast, leading to what some commentators see as a paralysing effect; a question of “Why change today when there will be something new along tomorrow?”

Cost is another major factor for schemes to consider. The implementation of new technology requires investment of both money and time. Although the cost of computer hardware has continued to fall the cost of systems has not, and in many cases has actually escalated due to increasing complexity. The introduction of tax changes introduced as part of A-Day simplification also brought with it additional requirements for scheme administrators and trustees.

DST International’s director Steve Fice says: “The concept of a lifetime allowance and authorised lump sum payments [tax-free cash] are not of themselves difficult concepts but the transition from one set of regulations to another inevitably results in system changes.

“The cost of these changes which are essential have to some extent clouded the issue of making systems more user friendly both for administrators and members. Administrators have had neither the time nor the money to consider whether technology could increase efficiency and improve the member experience.

Northgate HR’s divisional director Keith Galliford explains further: “The first barrier is the overall financial cost of upgrading the administration system, the hardware and the networks etc. In order to make a realistic business case the increase in efficiencies and the saving in ongoing costs often have to be very significant in order to warrant the expenditure.

“The second barrier is the time and resource needed to analyse, plan, specify and implement new technology in the pension’s environment. In-house pension departments and TPAs are incredibly busy and finding the time to release key staff from their day jobs is extremely difficult but necessary if the implementation of current technology is to deliver the required benefits. The compromise of buying in new technology but failing to release the resources required to implement it inevitably leads to disappointment.”

Given the considerable financial and energy costs involved in upgrading to the latest technology, trustees face a difficult task in choosing what system is right for their scheme.

Bird believes they start by agreeing an internal business strategy.

He adds: “Once this has set the three-year objectives, it will make a fit for purpose discussion much easier to have with suppliers. Then the core issue will be ‘Can I work with the supplier’s team?’ The best results often originate from the teams that have both client and supplier members.”

And Ellis says new factors are being used by schemes when deciding on what they want their system to do.

He adds: “In addition to software functionality and cost, the timeliness and approach to software implementation with them aim of reducing risk, is becoming an ever more important question in selecting a system. We are also increasingly seeing pensions managers and trustees looking to engage with existing users of software through reference site visits and telephone interviews.

“This provides an important insight not only into how the product and its capabilities can be used within a live environment, but also to the working relationship the software user can expect going forward. This covers their experiences both during implementation of the product and the support capabilities and culture beyond.”

So it seems as in most other parts of our lives, technology has grown to be at the forefront of how occupational pension schemes work on a daily basis; how they are operated by employers and accessed by members.

But while new developments such as web-based interactivity and straight-through processing will make life far easier for all involved, these developments will always come at a cost, financial or otherwise.