Around the world governments are swiftly forging ahead with mandatory pension provisions, moving much of the cost of old age off the state balance sheet. The UK launched co-contributed pensions in 2012. Dubai and Ireland will introduce forced pension saving in the next two years.
In Australia, where the defined contribution (DC) pension was introduced way back in 1992, population growth, increased contribution rates and new legislation to bring the gig economy and part-time employees into the superannuation system, are contributing to a rapid increase in pensions funds and assets.
With these enormous in-flows to the industry comes both a significant opportunity and responsibility for fund administrators. Firms need to ensure that their back offices are ready for the increase in pension funds and assets, so that they can easily add new assets, funds and grow assets under management (AUM) without a corresponding increase in headcount or overhead costs.
Despite leading the charge in pensions provision, fund administration technology in Australia is lagging, leading to reduced operational efficiency, higher staff turnover and new regulatory pressure.
The impact of outdated technology
Firms are incurring many hidden costs, from poor operational efficiency to higher staff turnover and regulatory risk from their lack of investment in technology over the years.
High costs maintaining legacy systems
The older the technology, the more highly skilled and experienced staff are required to manage all the associated operational and reputational risks caused by using antiquated systems and outdated operating models. This adds significantly to costs and reduces profit margins, even when the business is growing. It also leads to key person risk, which is very hard to manage with legacy systems.
Attracting and retaining talent in a stagnant sector
The use of outdated software solutions also adds an often-overlooked cost to business concerning recruitment. Many developers specialising in common business-oriented language, a programming language still used by many in our industry and which first appeared sixty years ago, are nearing retirement. Finding graduates who are not only trained in this language but who also have an appetite for developing pre-internet solutions, is near on impossible.
The amount of time and budget that needs to be invested in recruitment, interviewing, onboarding and training staff is a massive cost the industry is bearing. The best employees will not be retained by firms that are using them to firefight problems associated with old technology daily.
Around the globe, regulatory pressure is increasing with fund administrators under greater scrutiny than ever before. In Australia, the superannuation industry is under close watch following the Hayne royal commission. The Australian Securities and Investments Commission (ASIC) recently warned poor performing super funds with persistently low returns that they are at risk of investigation for misconduct by the regulator. Robust technology monitoring and reporting systems are vital to mitigate these risks.
Firms leading the way in fund administration
We see three types of firm leading the charge in modern-day fund administration in Australia. The first, the disruptors are a small number of dynamic fund administrators who seek best-of-breed technology vendors from day one to support a client-led service offering that is cost-effective, scalable and flexible.
The second group are the large, established service providers that are investing in digital transformation to stay relevant in a fast-changing market. These providers are revising their operating models and working closely with technology vendors to streamline operations, often reducing the number of specialist systems used to increase efficiency.
Finally, there are the major acquirers who face significant technology challenges as they merge many books of business. There are two mergers and acquisitions taking place in the Australian superannuation industry comprising $5 billion and $10 billion AUM in unit-linked funds. Due to the complexities of merging these books of business, while maintaining daily unit-pricing operations and acting in the best interests of the policyholder, these firms are looking to experienced technology vendors to design optimum operating model solutions and lead migration.
Mitigating migration risks
One of the reasons we often hear for deferring software replacement projects is the risk and costs associated with the replacement project. Across the industry, we are all familiar with failed projects or projects requiring significant additional budget or descoping to get them across the line. Even moving from one outsourcer to another can turn into a nightmare if unsuccessful.
Software and system vendors need to be strategic partners, with as much or more domain expertise as the asset manager or superannuation pension provider.
Investing in scalable, back-office fund administration technology is vital for asset managers, life and pensions companies who plan to succeed in this new era of mandatory pensions saving. With modern SQL databases for reporting, integrated general ledgers for risk mitigation, continuous deployment and automated testing of the application every day to make upgrades simple, firms can increase operational efficiencies and reduce risk in order to serve this fast-growing industry best.