Title: The Use of Information Technology in the Management of the Invested Assets of Private Pension Funds
1The Use of Information Technology in the
Management of the Invested Assets of Private
Pension Funds
Management of the Invested Assets of Private
Pension Funds EISA Conference - May 29 - 30
2Agenda
1- Introduction2- Investment of Pension Funds
Economic, Financial and Demographic effects
on Investment 3- Investment Challenges 5-
Information and Technological Challenges in
Investment Management 6- Conclusion and
Recommendations
31- Introduction
- Pension funds as dominating institutional
investors on global capital markets
- Under what circumstances are they desirable.
- How are they effective in protecting people
against risks and uncertainty.
- What risks facing pension schemes?
- Are private pension schemes capable of
- addressing these risks?.
4- What are the prerequisites that private pension
schemes must meet if they are to be viable?.
- What are the challenges facing pension
- schemes? And what are the choices?
5Global Pension Fund Assets (by share of GDP)
6(No Transcript)
7 The Global Dimension of Pension Investments
8The dominance of public DBs
160
Cumulative total countries with national pension
schemes
140
120
100
Public DB
80
schemes
60
40
20
0
1889
1899
1909
1919
1929
1939
1949
1959
1969
1979
1989
1999
9Economic Variables that Influence the Inflows and
Outflows of a Pension Plan
Contributions
Growthin the numberof workers
Totalinflows
Growth in wages
Investment income
Reserve
Interest rates
Benefits
Total outflows
Inflation
Administration
10Fund Objectives and Risk Constraints
Defined Benefit (DB) Pension Funds
Defined Contribution (DC) Pension Funds
In the both cases of DB DC schemes we need to
determine the followings
- Fund Objectives
- Fund stream of cash structure
- Investment Horizon
- Risk Tolerance
112- INVESTMENT OF PENSION FUNDS
PRINCIPLE Pension funds are financial resources
held in trust for the benefit of the schemes
members and their families. We need to ensure the
followings-
I- safeguard pension schemes ability to pay
benefits/provide services II- set out appropriate
conditions and parameters for investing
pension funds
III- Traditionally four criteria for the
investments of pension funds are promoted safety
, yield, liquidity and social and economic utility
12Purpose of investment
- 1- Allow liabilities to be met as they fall due
- - Liquidity - Matching
- 2- Produce good return to minimise cost of
benefits (or increase benefit levels) - 3- Control risks - diversification
- 4- Provide security for members benefits
- 5- Stabilise contribution rate
6- Provide source of development funding 7-
Provide finance for some public investment
projects or to further government policy 8-
Develop capital markets
13Nature of Pension Funds liabilities
- Normally long-term liabilities which need to be
met when arise - Some have more uncertainty than others
- Promise to pensions or other cash benefits in
future - Promise to provide non-cash benefits such as
healthcare - Contingent liabilities,
- Identify the liabilities to which the investments
relate
14Nature of Investments
- Amount and timing of cash flows and the degree of
uncertainty - Nominal or linked to inflation
- Marketability/liquidity
- Volatility of value
- Default risk
- Depends on market
- Possible embedded options
15Matching the assets and liabilities
- matching involves investing in instruments whose
value will behave in a similar way to the value
of the liabilities in varying financial
conditions - if absolute matching, no future changes in
conditions would affect the ability to meet the
liabilities - in practice, matching will never be absolute
- matching may be low risk, but may be expensive if
the matching assets have low returns
- Some Examples of matching and Suitability of
asset classes
16Investment Objectives
- It must be clear what that Investment strategy
intends to achieve.
- Good investment objectives should be unambiguous,
realistic and measurable.
- Investment Objectives are
- Achieve an investment return over the long term,
on the assets at least the same rate as assumed
by the actuary assumption
- Seek to maintain an appropriate solvency level in
the long term.
- Reduce risk by diversifying in many different
assets classes.
17STRATEGIC OBJECTIVES
- Rate of return in excess of the actuarial
assumptions - Net return compatible or better than specific
benchmarks - Sufficient liquidity to pay emerging costs
- Although investments with socio-economic
objectives are allowed these criteria are
subsidiary to the safety and profitability of the
investments
18The Comprehensive Process of Investment of
Pension Funds
Investment Management Responsibility
Economy Politics
Trading
Scenario
Duration ALM
Investment
Control
Portfolio Generation
Accountability
Rules
19Investment Policy and Strategy
- Risk management
- Diversification and dispersion
- Assets and liabilities testing including duration
and maturity - Currency matching
- Performance management
- Monitoring
20- THE INVESTMENT REGULATIONS
- 1- General Principles (confidentiality principles
Accountability issues Prudent Principles) - 2- Strategic Objectives
- 3- Investment Committee
- 4- Asset Allocation
- 5- Economically Targeted Investments
- 6- Valuation and Benchmarks
- 7- Performance Analysis
- 8- Restrictions on Investments
- 9- Custodians and Supervision by the Supervision
Authority
21INVESTMENT GUIDELINES
A need for detail investment policies and
strategies
- Investment needs a sound governance structure
- Governing body members must be suitable
- 1- Investment objectives
- Primary I. Security II. Profitability
- Subsidiary Social and economic utility
- 2- Investments must take into account
- I- Financial system(s) of pension scheme(s)
- II- National economic policies
22INVESTMENT GUIDELINES
3- Investment policy and strategy based on I-
Prudent-person principles II- Appropriate
quantitative restrictions 4- Restrictions on
investments I- no minimum allocations II-
maximum allocations/prohibited
investments III- can establish list of
recommended assets
5- Provide directions for the hire of investment
professionals / consultants / managers
236- National viable investments that ensure
soundness of investments and meet liquidity
requirements. 7- Investment Diversity
diversifying investments with focus on medium and
long term instruments to reduce risks and ensure
highest possible returns. 8- Investment
Fundamentals avoiding speculative instruments
and basing investment decision on economic
fundamentals. 9- Protection against Inflation
investing in instruments that secure the real
value of the fund. 10- Code of Ethics preventing
any conflicts between fund management and
individual interests.
24RESTRICTION ON INVESTMENTS
- The regulations may establish specific maximum
investment limits - Board must not approve investments that would
compromise the liquidity of the fund by extending
guarantees or collateral that could affect or
restrict the availability or disposition of an
investment - 1 year period can be set to adjust the investment
portfolio to the regulations
- Changing from a pooled-funds investment approach
to - one of segregation of portfolio according to
obligation - Increasing liquidity to match assets and
liabilities - Revised investment strategy More economically
targeted - investments with tangible risk-adjusted rates
of return
25Financial Instruments for Investment
Diversification
1- Money Market Instruments. 2- Bonds (Sovereign
and Corporate) 3- Loans 4- Traded Equities
(Publicly Listed) 5- Private Equities
(Unlisted) 6- Mutual Funds 7- Real Estate
(Property) 8- Bank deposits 9- International
Markets
26Investment decisions Portfolio structure
27Investment policy and resultsReal returns
relative to bank deposit rates
28Poor performance of pension funds Why?
1- Political interference 2- Market structure and
constrains 3- Inadequate Regulations 4- Weak or
lack of independent Supervision 5- Inadequate
investment decisions 6- High costs of
intermediation 7- Unqualified investment mangers
and staff 8- Demographic profile changes 9-
Artificial limits to maximizing behavior 10-
Governance 11- Accountability 12- Transparency
29Consequences of Poor Investment Policies and
Investment Practices
- Underperformance of pension funds
- Loss of funds due to mismanagement or even
corruption - Failure to meet income promises
- Higher retirement income may be in conflict with
other policy objectives (e.g. social investments,
economic growth) - Rates of return have tended to trail income
growth due to investment policy - High proportion of lending back to government
makes impact on national savings and growth rates
questionable - Low rates of economic growth will affect social
objectives
30Strategic Asset Allocation (SAA)
What is strategic asset allocation? The
efficient optimisation of investment allocation
to major asset classes of investment in order -
to meet the overall investment objectives of the
institution and - to achieve an acceptable
balance between risk and return
An investor has to decide on a portfolio of
assets, in order to meet a sequence of cash-flow
needs (or liabilities) over time.
31Allocation should maximize expected investment
return subject to a set of risk constraints which
takes into account the uncertainty of
cash-inflows and cash-outflows
- SAA involves
- Choosing Eligible Asset Classes (definition of
asset classes, operational considerations,
etcetera) - Finding Percentage Allocation to each Asset Class
(using optimization/simulation techniques) - Selecting benchmarks that reflect expected
performance of each asset class
32- A pension Fund is in need for a long term assets
allocation strategy.
- Problem defined as ability of assets to
- match or pay liabilities, not just investment
- of assets how much asset needs to grow
- The process of drafting long term assets
allocation strategy has three stages
- Plan Set clearly a realistic investment
objectives.
- Implement Translate the fund objectives.
- Review Periodically review the assets allocation
strategy and monitor manager performance.
33Strategic Asset Allocation Process
1. Fund Objectives and Investment Horizon
2. Risk Tolerance and Other Constraints
5. Implementing the SAA Setting the policy
benchmark
4. SAA Model Optimization/simulation methods to
determine the best long-term allocation
3. Capital Markets Assumptions and Eligible Asset
Classes
34Asset allocation theory
- optimisation of risk and return (Markowitz)
- there is a wide spectrum of possible portfolios
- rational investors select strategy on frontier
- to maximise return for given level of risk
- or to minimise risk for given level of return
- combine portfolio with risk-free assets to
reflect acceptable level of risk - assumes asset returns are known and normally
distributed
35Efficient frontier
5 4 3 2 1 0
B
A
C
Mean Rate of Return
0 1 2 3 4 5
6 7
Variance of Return
36Trading-Off Risk and Reward
- Efficient frontier set of portfolios which have
the highest possible expected total return for a
given risk level.
37Shares vs. bonds investment risk
383- Investment Challenges
a- Failure to deliver expected return b- Poor
strategic decisions c- Poor individual
investments d- Counterparty/credit risk e-
Inadequate diversification f- Mismatch of
assets/liabilities g- Market fluctuations h-
Unqualified and/or inefficient specialised human
resources
39Investment Challenges
i- Insufficient of available financial assets
and/or financial instruments
j- Immature and non-transparent financial markets
k- Stability of Pension Schemes Finance
l- Specialists in matching risk/return in asset
allocation models
40Investment Strategies Challenges
1- Finding skilled personnel to manage the assets
of the Scheme. 2- Managing the asset allocation
structure outlined in the investment
guidelines 3- Thin market makes getting in and
out of positions difficult 4- Securities
regulatory environment is still evolving
around the world 5- Lack of well-defined
market/sector benchmarks against which to
measure performance
41Governance of Investment Processes
1 An Investment Committee 2 Consult External
Investment Advisors. 3 Appropriate feasibilities
are carried before major investment decisions are
taken. 4 The Trust has to develop investment
policy guidelines that incorporates comprehensive
asset allocation guidelines/investment portfolio
mix. 5 Benchmarking and targets are monitored 6
Guidelines to be reviewed periodically in
response to changing economic environment.
42E-Operation Achieves the Following
5- Information and TechnologicalChallenges in
Investment
The level of computer literacy and use of IT,
application of modern effective communication,
and other technologies in the fund.
- Making significant improvement of effectiveness
and efficiency of the pension management - Optimization of data flow
- Application of advanced computer technologies
- Reduction of operational costs
- Fighting hidden operation and corruption, etc.
- Establishment of member-centric, cooperative,
multilevel and polycentric governance.
43E-Operation/Management of Pension System
- The major objectives of having the E-Operation
strategy - Simplification and rationalization of interaction
mechanisms between scheme members and the pension
fund management - Improvement of efficacy of pension funds in
delivering of the pension services - Elimination of redundant management layers
- Effective data sharing with the authorized
participants of the State Supervisory Authority
E-Government program - Effective and updated management of the invested
assets - Ensuring transparency in implementation of the
fund policy and regulations and basis.
44- Annual report circulated freely to the public and
government agencies - Financial Statements published in electronics
printed media - Members account statements are issued twice a
year - Dialogue/Communication with all stakeholders
- E-Management of pension funds assets/mange
investment portfolio electronically.
- E-Management System Performance.
- Application of Modern ICT.
- Consolidation of E-Management Resources.
- Modernization of Principles of Pension
Management.
45The Business and Administration Functions for
Automation
- Pensions and Benefits Administration.
- Investment management.
- Integrated Payroll and Human resource management.
- Office automation systems, internetservices.
- Document Image management system linked to
respective databases.
- The envisaged IT infrastructure is to have an
elaborate Executive Information System that gives
management an up to date status of the
operations.
46- Facilitate information delivery to the members,
employers and the public in general. - Having temper-proof Identification cards for
pensioners/members.
- The management will focus on core business
- rather than Information technology
- The services and support will be offered by
- specialist providers.
- There will be great flexibility through freedom
of choice. - More control due to customer-supplier
relationship.
47- IT affects the Structure and Organisation
of Pension Funds Administrators.
- Changes to organisation structure
- - changes in decision flows within the
organisation - - the move towards less physical operations to
tactical and strategic functions - - removal of geographical barriers, addition of
time, cultural changes where global - - Changes in new directions from operational to
core business functions.
48- Impact on decision making and support system
- - Improved accuracy
- - Greater control and efficiency in decision
making process. - - Shorter time frame and quality decision making
- - data being tailored by relevance to the
activities of the fund - Changes to management structures
- - Fund adopt flat based against hierarchical
structures to enhance compatibility of staff to
available resources. - - The need for effective reallocation of
resources - Outsourcing
- Improves processing speed, accuracy and reduced
cost per transaction - Enables organisations to systematically identify,
acquire, store, analyse, distribute and re-use
information and knowledge from all sources in
order to enhance organisational productivity and
competitiveness .
49IT use in investment can be broadly classified
into two main categories
1. Day-To-Day Business Management a. maintenance
of member's data (using some readily available
softwares) b. for communication with members of a
given scheme. For example, for administration to
send letters to all members on a particular
issue, Microsoft word and excel can be used
together. MS Excel keeps the data of all
individual members and using a tool called mail
merge, all the date can be transferred to MS word
document (one page or so for each member), saving
a lot of time and labour.
503. Excel can perform many calculations when
programmed and customised according to needs.
For example for a given scheme, all the
investment data can be recorded and updated on a
sheet using excel functions and tools. 4- Apart
from this, the given organization who is
in-charge of maintaining schemes assets and
liabilities can get few software developed
(called Multi Keys in my organisation), that
organize, sort and update different elements of
members details (personal, financial etc.) within
a given scheme.
512. Long term management of assets, liabilities
and investments
- Rely on specialised investment companies, and
- seek there advise on day to day and long term
- basis on investment issues.
- For an individual consultancy, it is an
impossible task to - keep record of all the financial developments
in a given - country.
- It needs a fully dedicated team of programmers,
financial - advisors and others to advise on the best
possible - investment options at a particular time and
will find a wide - range of product and support
- Specialized companies manage pension funds
assets. - Investment vehicles were also created to match
the - pension funds liabilities.
52Monitoring Risk limits and lines Using IT
- Limits have to be set for the portfolios at
several levels - Establish an approximate on-line monitoring of
framework model. Therefore risk control team can
follow minute by minute how our assets are
developing - Has daily reporting via a limit monitor and
electronically distributed reports - Control of prices in all trades
- Monitoring of collateral management
- Has daily calculations of net worth in relation
to The Financial Supervisory Authority's "red
light" specifications
53The dynamic principle Using IT
reduce risk
Upper risk-tolerance
Risk measure
increase risk
Lower risk-tolerance
time
54- Sets benchmarks according to actuarial
- projections
- Relevant return on investment and risk targets
are dependent on the specific circumstances. - Return on investment Expected creation of value
for the members - Risk Insolvency and red light and Return on
investment in the worst scenarios
- Investment Risk Control Implies
- Portfolio management is handled within the
defined lines and limits of risks at all times - Strong follow-up processes on investments due to
benchmarks determined by the Board - Strenghten the grounds for decision-making in the
portfolio management
55OPERATIONAL RISK
- computer failure or hacking
- contribution compliance and transmission
- allocation of contributions to individual
accounts - mistakes in record-keeping
- fraud or misappropriation of assets
- inaccurate expense allocation
- staffing problems
- poor risk management
- failure to implement legislation correctly
566- General Principles Conclusions
- assets should be appropriate to the liabilities
- diversification is needed to reduce risk
- between asset classes and within classes
- trade-off of risk and return
- correlations of risks and returns
- look for opportunities in Direct Private Equity
- Investment
- Expand investments in property
- Participation in new products offered by the
- capital market
- Diversifying investment overseas
57- Challenges for investment management and risk
management in the past - - Declining real interest rates
- - Plunging equity prices
- - A population that lives longer (longevity)
- Risk Management and Risk Control is vita
- Asset allocation policy set out to control risk
through - portfolio diversification
- Egypt has limited supply of quality domestic-long
and medium term investments - Egypts economy is characterized by a low rate of
domestic savings, - Demand for financial instruments is limited,
investments in financial obligations limited too.
58- The strategic assets allocation provides the
funds with clear long term investment plan
- It serves as a tool to balance the assets and
liability in the future.
- Review of the strategy every three years in
conjunction with the actuarial study.
- Conduct an actuarial study and review the
strategic assets allocation accordingly.
- Specialized companies have to be created to
manage - pension funds
- Investment vehicles have to be created to isolate
funds - from and prevent bankruptcy risks
59- Investment strategies are carried out through the
following investment principles and objectives - 1- A conservative approach in order to preserve
assets and reserves. - 2- Maintain the real value of assets.
- 3- Achieve maximum possible profitability to
extend the actuarial equilibrium period. - 4- Provide the necessary liquidity to meet
current and short-run obligations and
liabilities. - 5- Participate in projects that have a positive
influence on the national economy and social
development.
60THE WAY FORWARD
- The following measures need to be instituted to
deal with the implementation challenges - Comprehensive training of investment staff
particularly in E-Investment Management - Carefully defined sectoral benchmarks has to be
established against which manager performance
shall be measured - The fund has to be encouraged continued education
of investment professionals - Additionally, create investment activities wich
combine with that of insurance companies and
other provident funds to deepen the market
61IT adoption faces a number of obstacles such as
- There is a need to a adequate legislation to
support electronic transactions typical of this
is the evidence act, Bills of exchange act etc to
some countries
- literacy among the potential users, technical
- expertise to support and maintain IT
infrastructure - and the major obstacles being poor
telecommunication and lack of Computers
- While it looks cost effective the integration
of various - IT applications to support this structure is
not a - simple one
- Getting competitive proven software application
product for pension administration is difficult.