The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management


The Risks Of Legacy Systems: Making The Case For Pension Fund Modernization

Businessmen with laptopLegacy products and systems end up costing more in IT expenditures in the long run. It’s a proven fact.

This is true for not only the investment management industry, but across multiple sectors as well. If looking for a reason to modernize, pension fund managers need to look no further than the airline industry. The average age of American Airlines’ fleet is 15 years. This means that some planes are even older. Think about that for a minute. From a personal standpoint, are you regularly relying on any piece of technology with an average age of 15 years? The majority of our most crucial devices are significantly younger.

After filing for Chapter 11 bankruptcy protection in 2011, American Airlines planes faced at least two different emergency landing situations in 2012 due to issues with loose seats. As the issues piled on, US Airways snatched up a bankrupt American Airlines in a merger deal earlier this year. The impacts of outdated technology certainly played a role.

MF Global Loss

In Louis J. Freeh’s scorching report revealing what led to MF Global’s loss of $1.2 billion in customers’ funds, the former director of the FBI points to the “antiquated” and fragmented systems underpinning the firm’s operations which ultimately led to its demise. A recent SimCorp StrategyLab report revealed that legacy investment management systems, much like the airline industry, are also under stress. Surveying 125 respondents in Europe, North America, and APAC, the study focused on the cost of IT operations and the spending differences between fund firms running on a patchwork of older, custom-built solutions (legacy systems) versus those with state-of-the-art IT platforms. Over half of legacy system respondents are increasing their overall IT budgets versus 60 per cent of state-of-the-art system respondents who intend to maintain or decrease their IT operations spend. Based on the results, as client and market demands intensify, state-of-the-art investment management systems reveal a lower cost of operations over time versus retaining a legacy system.  

In a cut-throat market, pension fund managers need to apply the resources they have to help generate alpha. Allocating resources and investment in manual workarounds and inefficient processes will hinder growth. Pensions running on legacy systems should act now. Legacy platforms delay the launch of new products and entry into emerging markets. And while both initiatives can be supported with a lot of manual workarounds, which is still a common practice, these workarounds introduce the risk of costly errors.

Growth Initiatives

What pension funds should realize now is that taking on a ‘state-of-the-art IT system,’ which MF Global had planned to do, but failed to implement before the firm’s failure is not just an exercise in risk mitigation, but can very much support growth initiatives. Too often pensions cast off IT as a cost centre, but in today’s IT-driven world, technology can be and is a powerful enabler to drive business growth.

For pension firms, if the role of technology is limited to providing the latest in mobile phones and cloud computing, then the opportunity to leverage technology as a pillar in supporting sophisticated investment strategies that drive returns while keeping a tight grip on exposure has been missed. So for the many who put off or question legacy system replacements, we simply urge you not to let the likes of MF Global become your personal legacy.

David Kubersky is managing director of SimCorp North America.


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