Technology is rapidly reshaping the financial sector, and this transformation is also evident in the management and provision of pensions. Simultaneously, the pension industry is in the midst of a significant shift from Defined Benefit Schemes towards Defined Contribution schemes, while also relentlessly pursuing enhancements in operational efficiency, particularly in the realm of back-office processes.
The primary challenge lies in effectively combining the benefits derived from fund-of-fund/unitization strategies employed in portfolio management and investment activities, while simultaneously meeting the requirement for daily Net Asset Value (NAV) calculations, comprehensive fund accounting, and maintaining full transparency in both regulatory and financial reporting.
To address this challenge, a pivotal solution emerges in the form of pooling techniques and the utilization of pooled funds as distinct investment entities. Different solutions for supporting this are available. This article sheds light on how this goal can be accomplished using the SimCorp Dimension® platform.
POOL FUNDS SET UP
Axxsys Consulting is at the forefront of the developments within the Asset Management Industry and in recent years we have been involved in several projects with large pension fund providers in Europe and North America. This has included developing the overall scope to support, design and optimize Fund-of-Fund/Unitized investment processes and structures – across the whole investments value chain.
One example of these innovative solutions is the implementation of pooled funds setup for a European Pension fund provider that needed to support new legislative requirements based on the pension holder’s years to retirement and their expected risk appetite. The firm used SimCorp Dimension® as its investment management platform.
This highlighted the need for a re-engineering of their fund structures to provide flexibility in their existing systems while maintaining a competitive cost base and support of full transparency towards pension investors and decision-makers.
When a tactical change was implemented to enable the new requirements into the existing fund structure, operating separate legal entities, depending on the age and associated risk profile it resulted in an outcome where:
- There was duplication of holdings and additional effort across the legal entities.
- There were differences in return for the same asset class due to the difference in scale and associated trading and management costs.
It was expected that over time the data issues would increase so it was decided to restructure the setup to deploy a pooled funds structure that would address these issues.
POOL FUNDS STRUCTURE – WORKING EXAMPLE
The graphic below illustrates the pooled fund structure level approach where the pension holders are investing with a high-risk and a low-risk fund respectively. Pension holders that have more than 15 years to retirement will have 40% invested in the high-risk fund and holders with 15 years or less to retirement will have 20% in the high-risk fund. The remaining investments will all be in a low-risk fund.
Axxsys was the lead partner on the project and worked closely with the client’s own resources and the SimCorp team to maximise the use of existing features and SimCorp Dimension’s standard configuration packages.
For more information on how Axxsys Consulting can support the set-up of Pool Funds in SimCorp Dimension please contact us at info@axxsysconsulting.
Blog authors: Keld Jaksland, Director, Axxsys Consulting & Jorgen Johannesen, Senior Manager, Axxsys Consulting