How do APFs survive without pricing themselves out of the market? Two words: The cloud.
Historically, the European Union has provided a three-pillar pension system. In the first, by mandate, a portion of employees’ salaries are put into a collective state pension. The second pillar is a state-supported plan that allows employees to have salary deductions along with voluntary contributions from their employers put into a pension plan, which is different by country and has multiple implementation rules.
The third pillar, a private option, is a bit of both. If you have a life insurance policy, on retirement you can opt to take the money you’ve paid in premiums (DC) as one lump sum or in incremental payments, like a pension or an annuity (DB).
But things are changing.
Welcome to the Future
A new pension construct was introduced in the Netherlands, by law, on October 10, 2010, with enforcement effective January 2016. This general pension fund — algemeen pensioenfonds or APF — is a low-cost alternative for funds that want to retain their identities even if they were to opt for liquidation or to insure their liabilities. Since the law’s enactment, many pension providers and insurers have developed or joined APFs, which is provided as an adjunct for the second pillar.
Various kinds of providers can establish APFs. But industry sector pension funds can’t join one. A new provision of the law says a maximum three sector pension funds can join, but just for three years and only to create the administrative means of complying with the law. The purposes of this provision are to help fill the APF and maximize scalability.
APFs permit different pension schemes to operate under one board, and to include different risk and asset pools. They also have the potential to reduce governance costs 30 to 40 percent for smaller pension funds. Larger companies and pension funds can allocate individual asset pools to APFs. But sharing a pool with other participants yields the greatest cost benefits, by better pooling assets and risk. That’s the good news.
The bad news is APFs have to provide all the administrative services for all the benefits … under all of the schemes … for all of the people in them. That means all the companies, employees, bank accounts, plan types, retirement dates, and benefits that make up each APF have to be managed. And that all participants bear the risk when one or more go bankrupt or don’t pay their premium.
The Future of Pension Administration
With all of the administrative burdens that come with APFs — and with the potential for small carriers and providers to be merged with larger ones within any given APF — pricing becomes a crucial competitive factor. How do APFs offer services to pension companies of all sizes — to say nothing of employers — without pricing themselves out of the market? Two words: The cloud.
What’s required is a system that provides its functionality from the cloud, to minimize infrastructure and IT costs, even as it minimizes administrative costs by offering comprehensive but flexible functional capabilities. The system also requires portals, through which existing administration systems can connect, as well as interfaces for tax offices, registration offices, and all the other state offices to which pension administrators are required to report.
The Possibilities
While there are some systems available to handle some of the present requirements, there is no system available, at present, to handle all of the present requirements. What the pension industry really needs is a system with its foundations in the past, its functionality in the present, and its real power in the future.
