How technology can help us tackle the challenges ahead

In this context the UK pensions industry has much to absorb, be it technological advances, evolving demographics or significant regulatory change, as defined benefit and defined contribution schemes are still adapting to freedom and choice, and the 89 Local Government Pension Scheme funds are preparing to pool.

Technology, if adopted and properly harnessed, has the potential to help pension schemes and employers confront these challenges across the various activities they perform.

This is particularly pertinent to UK LGPS schemes, which, as they reshape to adapt to their new size and structure, have the opportunity to overhaul outdated legacy systems and benefit from new economies of scale.

Strategic allocation decisions  

Enhanced portfolio analytic tools are enabling pension schemes to perform more detailed economic modelling and simulations.

These simulations are often computationally demanding, particularly when they need to span 20-30 years or more, but newer data analytics technologies powered by cloud computing utilities are allowing these simulations to be performed much faster, effectively making possible a level of analysis that would not have been possible even a few years ago. 

Newer portfolio tools are also doing a better job of spanning the full range of asset classes a pension scheme might consider, as well as better aligning asset and liability-related calculations so they are consistent.

Manager selection and evaluation

The regulatory and industry’s own push for greater transparency is resulting in much more data being available on investment managers to aid manager selection processes. 

Market providers who aggregate this data can offer pension schemes a rich perspective on the various managers, including position-level detail and comprehensive comparisons across funds.

In their selection processes, pension schemes should also ask investment managers how they are harnessing technology – be it to enhance investment performance, strengthen controls and regulatory compliance, or reduce costs. 

Ongoing monitoring

Technology tools can also help pension schemes better monitor their asset allocation decisions and collective holdings on an ongoing basis, in the context of market, economic, and demographic shifts. 

Machine learning and natural language processing tools are being used to aggregate and analyse academic and industry research to deliver synthesised digests that are personalised to users’ interests. 

Similar tools can also assess traditional and social media sources to scour for potential risks and provide sentiment indicators on portfolio holdings.

Data tools that provide aggregated position-level detail across holdings, when coupled with the right analytics, can give scheme trustees a comprehensive view of risks, exposures, and liquidity. As in the strategic allocation process, increasingly sophisticated simulation tools can play a beneficial role here as well.

Support of pension scheme members

With the UK market increasingly moving toward a hybrid DB/DC model, pension scheme members’ needs are changing. 

The pensions dashboard is one effort aimed at these needs. On an individual basis, however, pension schemes can apply a range of technologies to better prepare investors for retirement. 

New industry-level data offerings will allow pension schemes to better support regulators’ 'product appropriateness' requirements by gathering richer investor profiles.

These same tools can also help investors to compare their choices and responses to different types of events, helping them with their decision processes.

UK pension schemes are facing a large amount of change. As the adage goes, however, with change comes opportunity.

Pension schemes that adapt will be able to better allocate assets, select and evaluate investment managers, provide needed services to their members, and monitor against possible risks, making them well-positioned for the future.

JR Lowry is EMEA head of State Street Global Exchange