The pension fund industry is undertaking an initiative to automate transaction processing between investment management product providers and third-party plan administrators. Key drivers have captured the industry’s interest in automation; yet challenges exist that the industry will need to address to improve STP.
Drivers
A key driver is the trend of switching pension schemes from defined benefit (DB) to defined contribution (DC) empowering employees to have more control over their retirement savings. With a growing funding shortfall in DB plans, with the accompanying liability, the trend seems to be catching on. According to a recent survey by Watson Wyatt, DC pension schemes have increased by over 10% from two years ago among the FTSE 100 with over half of these companies reporting 80% participation or more.
Edward Glyn, commercial manager of investment funds at SWIFT, comments: “With the explosion of new monies into DC pension schemes, it is paramount that the industry now collaborates to reduce cost and risk in DC corporate pensions processing. This must be done while establishing automation, harmonisation and the best business practice recommendations of the Investment Management Straight-through Processing Development Group (IMSDG), to provide choice, value and the best possible service to the end investor.”
Recent analyses by consultancies and industry groups have estimated DC schemes in the UK have a value of about £30bn, adding roughly £1bn per month.
Another driver is the growth in transaction volume. The growth of DC pension schemes, by their very nature, will generate significantly more transaction/messaging volume; far exceeding the volume generated by DB schemes, according to Steve Wallace from the UK pensions consultancy Idea Group. Of course, any effort towards achieving greater levels of STP would benefit DB and DC pension schemes.
Manually processing transactions where volumes are on the uptake puts extraordinary pressure on product providers and pension plan administrators to confront and manage increasing operational and processing risk. To alleviate risks and to reduce costs, the industry is moving towards automation using industry developed and accepted standards and communication vehicles.
Industry Initiative
An initiative to achieve STP in pension fund processing is being led by the IMSDG. The group’s members, leading investment management product providers and third-party pension plan administrators, are collaborating to design a standard set of message types and protocols to automate transaction processing. With services and guidance provided by Idea Group, the IMSDG settled on the ISO20022 UNIFI messaging standard to automate data transmission over SWIFT using SWIFTNet Funds. Is using a market practice messaging standard in a yet untested business practice with delivery over the industry messaging service (SWIFT) the right thing to do? Apparently so, as the group is preparing for phase 1 of a pilot to automate transaction processing and is moving forward with plans for phase 2 which will be extended to other investment management product providers and third-party plan administrators.
Challenges
Several challenges exist for the IMSDG and the industry to achieve higher levels of STP in pension fund processing:
- Broad acceptance and usage of the ISO20022 market practice UNIFI messaging standard and the use of SWIFTNet Funds.
- Enable other pension fund product providers and plan administrators to use the new market practice messaging standard.
- Establish a testing facility to accelerate acceptance and usage of the standard and to reduce the cost of point-to-point testing.
The UK’s largest investment management product providers and third-party plan administrators have applied resources (people and currency) to upgrade infrastructure and systems to use the new messaging standard. Achieving and improving STP rates across the industry will require even broader acceptance and usage of the standard.
The pilot planned by the IMSDG is a significant step towards achieving STP in pension funds processing. The number of participants in the pilot already represent a large portion of the industry in terms of asset size and messaging volume. There is now another issue the industry needs to be thinking about, extending usage to smaller product providers and plan administrators and to companies with self-administered plans.
Early adopters will achieve higher STP rates by gaining the interest and participation of other product providers and plan administrators. With this as a key objective, the IMSDG has teamed up with SWIFT to petition the industry for broader participation in phase 2.
A key issue with acceptance and usage is extending the ISO20022 market practice messaging standard and SWIFT connectivity to a broader set of product providers and plan administrators. This gets to the next challenge – enabling participation of other investment management product providers and third-party administrators, some of which are SWIFT members; yet most are not.
SWIFT members may elect to upgrade their SWIFT infrastructure and applications to support the ISO20022 market practice. Are members prepared to incur the cost and time to upgrade? Is it necessary? The issue is the same for product providers and plan administrators who are not SWIFT members. How do they achieve STP using market practice messaging standards and connectivity without incurring the expense of building the capability in-house?
The IMSDG and SWIFT have teamed up to address the challenge of participation by working with SWIFT member/concentrators or service bureaus to provide messaging and connectivity. A further challenge exists though for product providers and plan administrators wishing to use these services – creating and delivering ISO20022 market practice messages to a member/concentrator or service bureau for delivery over SWIFT. Tools are available to create messages that meet the SWIFTNet Funds ISO20022 message formats while complying with the business practices established by the IMSDG. Tools, however, put the onus on the product provider or plan administrator to manage the installation, deployment and ongoing changes to the ISO20022 market practice format – at an additional cost for professional services support and annual maintenance.
Another solution exists for those who do not wish to incur the expense of upgrading or building an in-house solution or using a tool to generate market practice messages. The solution will accelerate participation, including for those wanting to participate in phase 2 of IMSDG’s pilot, automate transaction processing using ISO20022 market practice standards and will enable STP for the user and insure higher STP rates for the industry. The solution is engaging a firm that combines extensive industry knowledge and experience with transformation capabilities to transform flat files or market practice ISO15022 messages into the ISO20022 message format, and also provides access to SWIFT. In the UK, there are a few firms that have combined such capabilities to offer this type of solution, like Evare. There are also firms that provide a combination of these services along with value added services, e.g. custody, trust or administration, such as Brown Brothers Harriman Infomediary.
What about the companies with self administered plans? How does the industry enable these companies to communicate with product providers? Several leading vendors have discussed building the capability to capture and automate transaction processing at the point of entry using the ISO20022 market practice messaging standard and SWIFTNet Funds.
Another key challenge for the pension fund industry is testing. This has become evident as the IMSDG prepares for Phase 1 of the pilot, where the product providers and plan administrators conducted point-to-point testing; adding incremental costs. The IMSDG is recommending creating a facility to simulate testing for product providers and plan administrators and to certify participants who meet market practice message standards using SWIFTNet Funds. Certification eliminates the need for point-to-point testing; accelerates time-to-market between participants; and reduces cost.
Testing was discussed at SWIFT’s November 2006 SWIFTNet Funds Users Group Meeting, which leads one to speculate that SWIFT may be listening.
Conclusion
Changes in pension schemes from DB to DC; rapid uptake of DC pension schemes; increasing transaction volumes; combined with the immense pressure to reduce cost and operational risk has the corporate pension funds industry taking action to address the challenges imperative to improving and achieving higher levels of STP.
Can the industry be successful? With the commitment, persistence and determination of the IMSDG and the help of SWIFT, the answer is yes.