DB ONLINE TOOLS The tools for the job
Digital technology is transforming how schemes can access timely information to make crucial decisions. Pádraig Floyd, financial journalist, surveys the online tools market
- information is power and pension schemes need all the help they can get, as the world in which we operate speeds up
- a scheme’s key stakeholders would like to get hold of tools that give them more regular updates on the health of the scheme
- this has resulted in a slew of online tools being made available to schemes to help them stay on top of the business of running the scheme.
Technology has a profound impact upon the age in which it develops, but the last 30 or so years has seen our society utterly transformed by the advance of digital technology.
Information is power and pension schemes need all the help they can get, as the world in which we operate speeds up.
Quarterly trustee meetings are simply not frequent enough to stay on top of important subjects, particularly the kind of projects that mature schemes face. This has resulted in a slew of online tools being made available to schemes – and to their advisers, in some cases – to help them cope with the business of running the scheme.
Same old, same old
The greatest concern for most schemes has been deficits. Deficits have been getting worse – take a look at Figure 1 for an example of what has happened in just the last two years. Though things got progressively worse in 2014, the two drops in 2015 and 2016 highlight the month to month volatility – almost £90bn between September and October 2016.
Mature defined benefit (DB) schemes need certainty in order to make decisions about their journey. That is very difficult in such choppy waters, so it is plain to see why schemes would like tools that could give them greater insight into how they are progressing.
What is going on?
Sponsors are running faster to stand still, says Helen Forrest Hall, policy lead, defined benefit, at the Pension and Lifetime Savings Association (PLSA), and this has consequences for the economy as a whole.
“The first concern is macro-economic, concerning jobs and growth, while the other is pensions based and concerns the willingness of employers to fund defined contribution pensions,” says Forrest Hall.
The interim findings of the PLSA’s DB Taskforce found that, despite the efforts on the part of schemes and sponsors and the backstop of the Pension Protection Fund, there is a risk that members face losing 15% to 20% of their benefits.
“What this means for member benefits is that the longer this goes on, the greater the chance for employers to fall over.”
This is because corporate actions will become increasingly difficult, as those with weak, or tending to weak, covenants will find it difficult to fund a sale or will default in the next 30 years.
“We’re running out of time,” adds Forrest Hall. “These schemes are increasingly closed and there is less chance to fund them with return-seeking assets.”
Who does what?
In light of this, it is easy to understand why a scheme’s key stakeholders would like to get hold of tools that give them more regular updates on the health of the scheme.
The vast majority of these tools are now available online, so users are not reliant on having the software installed on a local machine or server. However, despite the broad adoption of smartphones and tablets, you may still need a computer to access the tools.
All but two (see Table 2) are smartphone friendly. However, there are caveats in some cases: Barnett Waddingham’s works on a tablet only and KPMG’s requires a compatible version of Google Chrome, neither of which is a great handicap.
Only four products have dedicated apps (First Actuarial, Mercer, SkyVal and Willis Towers Watson). This may be considered unimportant by the trustee board or pension department, but it is less indicative of the quality of the system than the ability of the system to share data.
The whole point about new technology is to satisfy the demand for immediate – or timely – information and this may limit the power of reporting.
Most stakeholder groups may be granted access (see Table 1) to the system, though additional charges may apply.
A picture paints a thousand words
The beauty of these tools is that once you have access, you can generate reports – at least in theory. Where the tool is a window on the relationship with the actuary (Aon Hewitt), you are limited to running what-if scenarios – functionality offered by all the tools listed here. These are useful for generating follow up questions for your actuary, but in this example they do not allow you to generate or produce your own reports.
Equiniti, Mercer, Skyval and Veratta permit users to generate reports from the interrogation of their data. You can download, print or email these reports to others.
Equiniti’s tool allows you to generate reports as Microsoft Office documents, which can then be imported into other systems.
Though on paper, Aon’s tool lacks reporting functionality (see Table 5), Michael Maltwood, a principal at Aon Hewitt, argues this is less about the quality of the tool than how it is used in the consulting process. He says 95% of Aon clients will have seen the tool used in a meeting or have used it themselves.
“It is at the core of how we like to deliver our service to clients and different parts of the business may use it in different ways and to different extents.”
While other tools may offer more to the user, this does not necessarily make these tools better. Bells and whistles are all very well if a) you make use of them and b) do not have to worry about paying for them.
Data day use is encouraged
Robert Hunt, a director at Xafinity Consulting, says that tools are mostly used by clients to check deficit funding, but there is functionality to look at investment strategy.
Those wishing to have daily access are using it to monitor specific funding triggers, and this is happening more regularly with both trustee and employer clients.
“Trustees are not happy waiting until six weeks after the quarter end to get these numbers and would rather have them the day after if they can,” says Hunt.
Other than triggers, the data is most useful around the triennial valuation, says Hunt. It allows trustees to test one assumption against another, which can prove helpful in the negotiations with the employer.
“Trustees can determine whether the contributions are proportionate against dividends, paying off debt, or building the business,” says Hunt. “It also allows conversations to be had up front, so there are no big surprises for the employer from the valuation.”
Many clients use the tool to formulate ideas and then ask advisers to work up projections and strategies for the next meeting, he adds.
What is the frequency?
The functionality of the system will vary greatly, according to what the scheme requires. Table 3 sets out the vast array of modules that are available to client groups, which covers anything from the bread and butter of asset and liability tracking through to buyout price tracking for those approaching nirvana – buyout.
The most important component is the data that underpins them. For those who wish to be on top of member data, there are only two providers whose tools will give real time information and they are Equiniti and Veratta.
When it comes to investment, only Equiniti and Mercer offer real time information. Those who did not disclose a frequency claim that it is determined by the client (Aon Hewitt) or as frequently as the client wishes (Barnett Waddingham and KPMG).
Arguably, if you do not need real time information, then why would you choose it? Well, the availability of information may be an insight into what is going on behind the scenes, suggests Tom Nimmo, business development manager at Veratta.
“Integration between the administration and actuarial data is absolutely key to schemes over the size of 1,000 members if trustees are to make good decisions,” he says.
However, not all systems are created equally. Be sure that the systems that underpin the data are fit for purpose.
“I believe quite a lot of the automated systems involve a higher than expected manual intervention and data wrangling equals costs,” says Nimmo. “If you believe you have a good system, look at how transparent your access to the underlying information is.”
If access to the data is immediate or close to it, then there is less chance of data being contaminated by human intervention.
No two the same
The difficulty with comparing one system with another is that just as three actuaries in a room will offer you five different theories, so these tools are founded on the assumptions of your own provider.
This is something to be aware of, says Nimmo. Though a scheme’s relationship with an actuary is long term and based on trust, the assumptions and data sets used will influence the results and two different tools will probably give two different answers.
“Some will use cash flow to determine future liabilities, others may aggregate groups of members or allow liabilities to be calculated based on each individual member,” he says.
“This may allow for much more granularity, but there are differences in how the numbers have been calculated. It may be that some systems are not as detailed as others.”
Even if there are limitations to these tools – they are only snapshots and won’t always offer context – they have proved to be highly beneficial, says Nathan Blackwell, operations director of PwC’s Skyval tool. “It really has transformed the way people work and it has become our primary consulting tool.”
Maltwood at Aon Hewitt says the real benefit has been in getting people engaged more quickly. This allows advisers to speed up the process of trustee education. “It’s hard to see how technology could be used to prevent a BHS scenario,” he says, “but in terms of governance, it’s helpful to make some or all of those areas more easy to visualise. It raises the bar because you now have the information you need to make decisions.”