fin_pensions and provident funds - leveraging technology to secure asia's future1

October 2006, Financial Insights #FIN204044 Financial Insights: Asia/Pacific Banking Advisory Service: Case Study

Pensions and Provident Funds: Leveraging Technology to Secure Asia 's Future

A s i a / P a c i f i c B a n k i n g A d v i s o r y S e r v i c e A s i a / P a c i f i c I n s u r a n c e A d v i s o r y S e r v i c e

CASE STUDY #FIN204044

Douglas Jaf fe Shawn Yip

F I NA N C I A L I NS I G H T S O P I NIO N

The future of Asia's economic dynamism is dependent on the policies it enacts today to address an expected shift in demographics and a move to a more gradual growth path. Population aging has the potential to reduce the living standards of an entire generation. To counter the impact of this inevitable change, governments must focus on reforming their pension and provident fund (PPF) industries. Information technology and outsourcing are two powerful tools for assisting in these reform efforts. Already, we are starting to see examples here in Asia that can provide lessons and guidance for countries all across the world. In addition:

● There is a clear need for further reform in PPF industries across Asia, especially in the developing economies. These investments are required to improve efficiency, transparency, and governance and to meet the increased demands of both members and regulatory bodies.

● Opportunities exist for the outsourcing of noncore processes and other functions common to all PPF market participants. There are regulatory hurdles to overcome in each market, but it is time for service providers and industry players to begin discussions.

● There is a clear market demand for PPF applications that leverage new technologies and integrate better with other key solutions and processes.

● Regulators and PPF governance bodies need to focus more attention on the technology and process side of the industry they oversee. It is imperative they remain abreast of technology changes and the impact of outsourcing if they are to regulate wisely and with sufficient prescience.

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#FIN204044 ©2006 Financial Insights, an IDC Company

T A B L E O F C O N T E N T S

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In This Report 1 Brief Description of the Situation............................................................................................................... 1 Situat ion Overview 2 A Change Is Occurring ............................................................................................................................. 3 Future Outlook 4 Russell Investment Group ........................................................................................................................ 4 Coal Mines Provident Fund Organization ................................................................................................. 12 A Bright Future.......................................................................................................................................... 18 Essential Guidance 19 Actions for Financial Institutions ............................................................................................................... 20 Actions for Vendors .................................................................................................................................. 20 Learn More 21 Related Research..................................................................................................................................... 21 Appendix................................................................................................................................................... 21

©2006 Financial Insights, an IDC Company #FIN204044

L I S T O F T A B L E S

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1 IBM Investment Initiatives ............................................................................................................ 9

2 Benefits for Russell ...................................................................................................................... 10

3 Benefits for IBM............................................................................................................................ 11

4 Future Challenges and Concerns................................................................................................. 11

5 Project Benefits of the Coal Mines Provident Fund Organization Implementation ....................... 16

6 Challenges Faced During the Coal Mines Provident Fund Organization Implementation ............ 17

7 Pension Assets Under Management by Selected Country, 2004 and 2015................................. 19


L I S T O F F I G U R E S

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1 Asia/Pacific Demography: Old-Age Dependency Ratio by Selected Country, 2005 and 2050..... 3

2 Russell/IBM Project Timeline ....................................................................................................... 9

3 Coal Mines Provident Fund Organization/SAP Project Timeline.................................................. 15

©2006 Financial Insights, an IDC Company #FIN204044 Page 1

I N T H I S R E P OR T

B r i e f D e s c r i p t i o n o f t h e S i t u a t i o n

In many respects, the countries of Asia/Pacific are in the midst of an economic golden age. Strong growth, low inflation, and an acceptance of market-oriented development contribute to the region's success, while demographic factors continue to favor most nations. Young populations coupled with strong support for education provide a solid foundation for growth. To be sure, there are countries with impending population time bombs, but generally speaking, this is a good time to be in Asia.

Governments, primarily in the mature economies, do not take these good times for granted and have created or encouraged the development of PPF industries. These are intended to mitigate the impact of economic downturns and ensure that citizens enjoy a degree of security throughout their lifetimes.

While commonplace in the West and in a few mature Asian economies, the majority of countries, especially those in developing Asia, have only just begun to establish these systems. Even where they exist, they are primitive and plagued by inefficiency and are unsuitable for providing long-term security. Coverage levels remain low and often only extend to specific groups � government workers or specific industries. Considering that golden ages never last, this is a concern.

With the reduction of government guarantees � China's Iron Rice Bowl, for example � there is an urgent need to create structures to provide this vital function. In addition, the traditional family network is being replaced by a more urban society with fewer children and a consequent reduction in the levels of family support. Even in places where rudimentary PPFs exist, there is a need for reform and further investments to improve efficiency and introduce transparency. Building a sustainable and viable PPF industry is a vital part of a healthy economic future and is increasingly a priority for Asia's governments.

Information Technology and Outsourcing

It is not the place of this report to discuss the legal or regulatory aspects of building or reforming the PPF industry. Rather, this report looks at two increasingly important components of all PPF strategies: information technology (IT) and outsourcing. These are being employed to improve efficiency, increase choice, and introduce a greater degree of accountability, control, and transparency.


To highlight the importance of these two areas, we present two case studies from completely different ends of the PPF spectrum. The first is from Australia, one of the world's most sophisticated PPF markets, while the second is from India, a market taking its first steps toward PPF reform. Both highlight important industry trends and are relevant to markets across the world.

S I T U A TI O N O VE R VI E W

Good times do not last, and nowhere is this more evident than in the demographics underpinning Asia/Pacific. Figure 1 presents old-age dependency ratios � the ratio of those 65 years old and older to those in the 15- to 64-year-old range � for nine countries across the region. As 2050 approaches, the situation will become increasingly dire for the mature economies of Korea, Japan, and Taiwan. Even though China, Thailand, and India will have more favorable ratios, they are not far behind. More important, though, they lack the resources of their richer peers to handle this transition � lower per-capita GDP � and this is a concern.

Figure 1 highlights a very real problem for all regional economies and underscores the importance of creating a sustainable PPF industry. While not included in the above figure, countries like Vietnam, Indonesia, Pakistan, the Philippines, and others exhibit similar traits and will face similar challenges in the decades ahead.

These developing countries are the ones that matter. At the end of the day, Australia, Hong Kong, and Singapore are far better equipped to manage their population transitions. The real challenge will lie in the rest of the region, which is home to the vast majority of Asia's population. How governments in these markets react to these demographic trends will be the key determinant of future economic sustainability.


F I G U R E 1

A s i a / P a c i f i c D e m o g r a p h y : O l d - A g e D e p e n d e n c y R a t i o b y S e l e c t e d C o u n t r y , 2 0 0 5 a n d 2 0 5 0

22.2

34.6

38.9

49.4

55.9

58.3

63.8

66.6

69.4

8.4

10.2

12.0

19.4

11.8

16.3

13.4

30.0

12.6

0 10 20 30 40 50 60 70 80

India

Thailand

China

Australia

Singapore

Hong Kong

Taiwan

Japan

South Korea

(%)

20052050

Source: Allianz Global Investors, Allianz Group Economic Research, 2005

A C h a n g e I s O c c u r r i n g

Although the pace of reform differs greatly across countries, there are a few noteworthy trends. The patchwork of PPF coverage in Asia includes a mix of pay-as-you-go (PAYG) systems with funded pensions. Some countries have obligatory PAYG systems supplemented with funded pensions, while others operate structures that combine both PAYG and funded pension elements. (Please refer to the Appendix for a more detailed explanation.)

While the landscape appears quite diverse, there is a clear shift toward the funded pension, and reform efforts in many developing economies


are moving in this direction. There is also a move away from defined benefit schemes in favor of defined contributions. This is an important shift and is in line with a growing acceptance of allowing individuals greater choice in terms of how they plan for their own retirement. This means increased freedom to decide how these assets are invested, as well as new regulations that permit accounts to be transferable when individuals change employers.

From a coverage perspective, the situation is not ideal but improving. With few exceptions, coverage in most Asian markets remains quite low. Even in Korea, which faces a daunting demographic future, coverage is less than 40%. China, India, and the other developing countries have far lower coverage figures, and often the coverage that exists is for specific groups � government officials, work collective/corporation, industry unions, etc. Increasing coverage is a priority for all governments, but the rates lag significantly behind most industrialized countries.

Reform is certainly occurring and remains a stated priority of all regional governments. How they undertake these reforms depends on national conditions, but a common, yet poorly understood, component is around the technology and processes. New technologies and outsourcing strategies not only are critical to any and all reform efforts but also have the potential to help governments meet their stated objectives. Going forward, we expect the PPF industry will follow its banking and capital market peers and embrace IT-led strategies as a central part of transformation.

F U T U R E O UT L O O K

In this section, we present two case studies highlighting the growing importance of technological innovation and outsourcing to reform efforts in the PPF space.

R u s s e l l I n v e s t m e n t G r o u p

Founded in 1936, Russell is a global investment services firm offering investors a comprehensive suite of investment and actuarial solutions. A subsidiary of Northwestern Mutual and headquartered in Tacoma, Washington, it has offices throughout the world. Russell adopts a "multiasset, multistyle, and multimanager" approach to its global investment strategy.

In Australia, Russell offers its flagship SuperSolution, which is made up of two core elements: Russell MasterTrust, which serves as a default fund for superannuation contributions for Russell's members under administration; and the Russell ChoiceSolution, which provides a comprehensive set of support services. Russell's master trust product has approximately US$14 billion in assets under administration.


The Superannuation Industry

Superannuation is money saved during an employee's working life to provide an income after retirement. It is part of Australia's Three Pillar System for retirement savings that includes:

● Compulsory superannuation

● Voluntary savings

● Government pensions

Compulsory superannuation contributions, first introduced in 1992, ended the dependence on the government-funded social security pension. This means that employers are legally required to contribute a sum (also known as the superannuation guarantee) for employees into a complying superannuation fund or retirement savings account at least every three months. This mandatory contribution amount for employers is calculated as a percentage of the employee's ordinary time earnings (OTE), with the percentage being raised from 3% to 9% between 1992 and 2002. Voluntary contributions are also encouraged through the Super Co-contribution scheme, in which the government matches eligible personal contributions with a co-contribution up to a limit of A$1,500 annually.

Superannuation contributions are typically categorized into retail, industry, or corporate funds, depending on the scope, and are managed by trustees charged with ensuring that the funds are invested prudently. These are retained until the employee reaches the age of 55, when they can be withdrawn either in the form of a lump sum payment, a superannuation annuity pension, or a combination of the two.

Introducing Choice

Having adopted a compulsory yet decentralized PPF model, Australia is widely regarded as having one of the most sophisticated systems worldwide. The move toward defined contributions sounded the death knell for preexisting defined benefits schemes and meant that companies could no longer rely on benefits offered under company schemes to be a differentiator in attracting and retaining employees.

A series of measures designed to foster innovation, promote efficiency, and ensure sustainability in the provision of retirement savings were rolled out. One of the most significant reforms has been the introduction of Super Choice in 2005. In response to demand for greater mobility of funds, members can now choose the funds in which to park their retirement savings, irrespective of their past or present employer. This intensified competition in the superannuation sector, with industry funds opening their doors to the public to compete head-on with corporate funds. First State Super, AGEST, and Vision Super


are examples of industry funds hoping to broaden their member base and preserve their assets under management by moving to public-offer status.

Move Toward Consol idat ion

The changing demands of an environment that shifted from an institutional focus � where the primary customer was the corporate superannuation plan � to one where the individual is the main customer, led to a proliferation of accounts, where each member had on average three Super accounts. This resulted in greater complexity in the back office, with many companies setting up their own pension departments and administration systems, and invariably meant increased PPF administration costs, which were passed on to members.

The regulatory environment also placed great constraints on resources. Funds with more than five members are mandated by the Australian Prudential Regulatory Authority (APRA) to obtain the Registrable Superannuation Entity license by July 2006. The licensing process is time consuming and costly. License applications, with a fee of A$20,000, have to be thoroughly vetted and accepted by APRA. In addition, regulations such as the Member Protection Standard, which ensures that administration costs for small accounts (below A$1,000) do not exceed investment returns, further increase the cost of administration.

As a result, more than 75% of the trustees have opted to completely outsource their fiduciary responsibilities. Smaller funds have merged in a bid to improve efficiencies, pooling their funds in multiemployer arrangements known as master trusts. According to APRA, the number of corporate funds fell from 1,050 in March 2005 to just 646 a year later, and the number has fallen sharply since then in light of the July licensing deadline.

With contributions to employees no longer regarded as salaried expenses, and hence taken off balance sheets, corporate Australia is rapidly getting out of the day-to-day involvement in the provision of retirement savings. The introduction of Super Choice, and the threat of greater mobility of superannuation funds means greater potential costs and has prompted companies to rethink whether to continue operating and maintaining pension administration systems in-house or to outsource.

Business Drivers

In the late 1990s, Russell began offering investment solutions to companies outsourcing pension investments. To meet corporate demand for an expanded range of PPF services, Russell undertook a strategic partnership with Towers Perrin in Australia. Russell continued to focus on investment solutions, while Towers Perrin


handled back-office processing and administration. Then, in 2004, Russell took over the firm's operations (managing about 200,000 member accounts) to deliver a more seamless solution for outsourcing corporates.

Following the acquisition, Russell soon recognized that PPF administration was a scale game. This meant there was a compelling case to outsource noncore activities to a third party better positioned to reap economies of scale. Having already subcontracted unit pricing and transaction processing for its portfolio of funds to State Street, Russell looked to do the same with its back-office functions. Adding to the impetus for change was the cultural dissimilarity of the process-oriented nature of member administration with Russell's traditional "knowledge worker" environment.

Decision to Outsource

The changing industry landscape and the realities of the processing and back-office side of the superannuation business led Russell to consider outsourcing. The choice of IBM was driven by various factors, but it is important to note that prior to the acquisition of Towers Perrin's Australian business, Russell contracted IBM to conduct due diligence. This gave IBM good insight into Russell's operations and positioned it well for the future outsourcing contract. Following an evaluation against global players such as Accenture and EDS, IBM was chosen to deliver an administrative back office for Russell's master trust product.

Implementation

Russell's agreement with IBM is a seven-year business transformation outsourcing (BTO) deal worth approximately US$100 million to take over the operations of Russell's member administration center in Sydney, a legacy of the Towers Perrin acquisition. This administration center handles the processing of member contributions, redemptions, and transactions. This new business line is handled by a subsidiary called IBM SuperLife. Key aspects of the deal include:

● In addition to taking over the premises, workstations, and equipment, 200 of Russell's member administration staff have been offered jobs with IBM under like-for-like terms and conditions.

● Technology costs and risks are to be transferred to IBM and reflected as a consolidated monthly payment to the vendor in Russell's accounting books.

● Russell maintains a small IT team, with the primary responsibilities of managing the desktop environment, printers, and ensuring connectivity with Russell's head office. In addition, it has an in-house vendor management team to oversee the overall IBM relationship.


● Russell continues to own the customer relationship, but IBM administers many of the client-facing processes (e.g., call center) on its behalf.

Project Goals

Russell wanted to outsource its noncore back-office activities to a provider that would also be responsible for improving the various workflow processes. It wanted a true business transformation engagement.

By outsourcing functions such as record keeping, benefit payments, claims processing, and report generation to a third party with the ability to scale, Russell hopes to lower the unit costs of administration while maintaining or improving service standards. The outsourcing of back-office functions also means a significant risk transfer to IBM and a shifting of responsibility for a variety of technical and operational aspects of the business. There is also the accounting benefit as the agreement moves a large chunk of fixed costs off the books.

Win-Win Agreement

It is important to note that Russell's goals are in line with IBM's desire to create an industry utility. IBM required an anchor client around which to build this business and quickly establish a market presence. The success of the deal thus represents a potential win-win situation for both parties. As IBM brings on more clients and increases volumes, the unit costs will go down for all utility members, including Russell.

IT Investments

Russell's legacy IT infrastructure was made up largely of homegrown proprietary systems running in a Unix environment. The service administration center it acquired uses the Superb record-keeping solution, designed initially to handle complex defined benefit schemes. To ensure different types of funds can be managed on the existing infrastructure regardless of the underlying application, IBM is looking to build a front-end application layer.

Table 1 details the key investment initiatives, as laid out by IBM.


T A B L E 1

I B M I n v e s t m e n t I n i t i a t i v e s

Investment Description

CRM IBM will invest in CRM capabilities, with a focus on integrating all customer contact points (call center, Web, service center, etc.).

Service standards Related to meeting customer demands are planned investments aimed at improving service standards. These are typically measured by the time needed to verify customer PINs or security passes, access account balances, and provide visibility into the status of applications and transactions.

Streamlining operations IBM will invest in remote server monitoring, integration of the Web site with the call center, and setting up a full-time help desk.

Imaging and workflow Investments in imaging will be undertaken to facilitate document management. A more scalable workflow system will be rolled out, with the capacity to handle multifold increases in processing volumes.

Customer access IBM will look to introduce functionalities to improve account accessibility. Legislation permitting, there are also plans to provide greater choice to members online in changing their fund mix and moving funds between accounts.

Source: Financial Insights, 2006

Timel ine

Figure 2 presents the project timeline.

F I G U R E 2

R u s s e l l / I B M P r o j e c t T i m e l i n e

January 2006 � Russell signs BTO deal with IBM

July 2005 � introduction of Super Choice

July 2004 � licensing requirements for funds are enforced

August 2004 � Russell�s acquisition of Towers Perrin�s Australian operations

March 2006 � IBM assumes control of the member service administration center, and staff are transferred over

2005

February 2005 �launch of Russell SuperSolution

20062004

January 2006 � Russell signs BTO deal with IBM

July 2005 � introduction of Super Choice

July 2004 � licensing requirements for funds are enforced

August 2004 � Russell�s acquisition of Towers Perrin�s Australian operations

March 2006 � IBM assumes control of the member service administration center, and staff are transferred over

2005

February 2005 �launch of Russell SuperSolution

20062004



Business Benefits

It is worth noting that although Russell and IBM have distinct agendas, both have strong vested interests in the agreement. By linking the BTO contract with a utility offering, IBM is taking an aggressive step to position itself in the PPF industry, while concurrently servicing an important industry player. Tables 2 and 3 detail some of the respective benefits that Russell and IBM hope to see out of the agreement.

Note: As the project is quite new, Russell is unable to provide any formal metrics.

T A B L E 2

B e n e f i t s f o r R u s s e l l

Benefit Description

Risk transfer The firm has transferred a variety of operational risks to IBM, which will be responsible for meeting service levels and managing issues related to security, fraud, regulatory changes, new technologies, and other unforeseeable events that could impact the business.

Cost efficiencies The cost of future investments in technology and process reengineering has been shifted to IBM. In addition to contractual cost reductions built into the BTO agreement, Russell will also benefit from further reductions provided IBM is able to increase the utility's volumes.

Service standards In the competitive superannuation industry, service quality will be a key differentiator. Service-level agreements (SLAs) around uptime, exception handling, processing efficiency, and other related areas ensure Russell has an efficient, responsive back-office operation.

Cultural alignment Management issues and cultural conflicts stemming from Russell's acquisition of Towers Perrin's business have largely been resolved with the transfer of operations and staff to IBM.



T A B L E 3

B e n e f i t s f o r I B M

Benefit Description

Anchor client IBM has a strong reference client that can provide credibility and sufficient volumes to justify the investment. It has created momentum in the Australian market and has established a utility that can offer services for other PPF players.

Test case IBM has worked on BTO agreements elsewhere in the life insurance industry, but this tie-up represents its first entrée into the PPF utility space. The deal thus provides a test case from which IBM can learn and improve.

Market presence The significant number of Russell accounts under IBM's administration management has provided IBM a platform on which it can quickly build a strong market presence.

Industry first There is the possibility that IBM can expand this business to create a pan-regional or global industry utility.


Challenges and Lessons

It is still early days, so there is little yet known about the possible future challenges that will appear over the next six years. Thus stated, Table 4 outlines some of the potential trouble spots.

T A B L E 4

F u t u r e C h a l l e n g e s a n d C o n c e r n s

Challenge Description

Cost targets Achieving the contractually agreed upon cost reductions while maintaining sufficient margins could be a challenge for IBM.

Service levels As this is a new endeavor for IBM, there could be challenges around meeting service levels. This includes upgrades, maintenance, process reengineering commitments, and new application rollouts.

Regulatory changes IBM is responsible for adapting Russell's systems to any new regulatory mandates. As these are difficult to predict, IBM risks being obligated to make massive, future investments to comply.

Utility model The long-term value of this BTO agreement with Russell lies in IBM's ability to expand the engagement and create a true utility. If it is unable to bring on new customers, then that value will not materialize.



Future Plans

With Russell as its anchor client, IBM now has a platform on which it can quickly establish a foothold in the market. Going forward, IBM has targeted an ongoing reduction in the unit costs of administration as scale increases. To achieve this, it is likely IBM will leverage its experience in running offshore processing centers in low-cost regions such as India and the Philippines. Thus, IBM's new utility might eventually relocate some administration activities � currently located in Sydney's central business district hub � to further lower costs and boost margins.

C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n

Established by an Act of Parliament in 1948, the Coal Mines Provident Fund Organization (CMPFO) is tasked with ensuring the social security of India's coal miners. It is based in Dhanbad in the state of Jharkhand and operates across 23 regional offices at 17 locations. These are generally remote areas located within India's coal belt.

A board of trustees administers the CMPFO and is made up of 21 members from the Union of India and representatives of the central government (3), state government (6), employers (6), and employees (6). Within the CMPFO are four administered schemes. These include:

● Coal Miners Provident Fund Scheme

● Coal Miners Pension Scheme

● Coal Miners Deposit Linked Insurance Scheme

The CMPFO has around 600,000 members and serves approximately 250,000 pensioners. More than 20 active coal companies are part of the system, and this number continues to grow. The CMPFO administers approximately US$8 billion worth of funds.

How It Works

On a monthly basis, 12% of each coal miner's salary is deducted and is matched by the specific employer. These funds are remitted to the CMPFO and then on to IDBI, the organization's bank. An administrative charge of 3% of the total contribution is levied by the CMPFO. There are two kinds of benefits payouts: monthly pensions and a lump sum, which is settled immediately upon retirement. Miners are able to withdraw advances after an initial subscription period has passed.

The investment strategy of the CMPFO, as mandated by the government, is conservative, and the majority of funds are kept in


bank deposits in the government banks. Only 5% of the fund can be invested in the equity markets.

Business Drivers

Although the CMPFO enjoys a long history in India, many of its processes and practices were dated and unsuitable for today's environment. The CMPFO used primarily manual processes and had limited reliance on information technology. Not only did this hinder interactions with fund managers, it also encouraged corruption and inefficiency.

Unions were particularly concerned about the lack of transparency into the usage and allocation of the miners' funds and demanded accountability. Related to this issue of transparency were concerns about the time lag between when funds were remitted every month to when the annual summary statement was prepared for each subscriber. This gap provided ample time for errors and other problems to accrue out of sight of overseers.

CMPFO management was aware of these challenges and had made a previous attempt to computerize and automate the key processes. It had originally contracted a local vendor to undertake the project, but this failed to get beyond the planning stage. This led management to look for experienced, reputable players with proven methodologies and track records.

Implementation

Project Goals With the strong support of B. K. Panda, CMPFO's IT-savvy commissioner, the fund was keen to leverage technology to address some of the issues cited above. Automation was an important focus, and this is evident in the introduction of online claims and settlement, online status information, and real-time grievance redress. To achieve these aggressive goals, CMPFO relies on two external providers.

Technology Partners and Solutions CMPFO is working with SAP and an IT consultant, Webel Technology Ltd. (WTL). SAP was chosen as the solution provider following an evaluation against Oracle. CMPFO selected SAP's Financial Services Collection and Disbursement (FSCD) solution. The FSCD is an end-to-end solution built on a single, integrated platform for provident funds, advances, and pension settlement and comes integrated with financial accounting. It runs on an Oracle database. IBM is SAP's hardware partner and provided its pSeries Unix servers through its local partner, Omni Infoword Private Ltd. Omni also provided some basic hardware, including PCs and training.


The primary site is located in Dhanbad (Eastern India) and is connected to the 23 regional offices via an MPLS-VPN with IP telephony and video conferencing. The disaster recovery site is located in Hyderabad (South India).

The SAP solution covers a variety of areas, including:

● Enrolling new members and maintaining beneficiary details

● Updating monthly member and employer contributions

● Recording, processing, and settling claims for advances, provident funds, and pension settlements

● Calculating benefits under various schemes stipulated by the Coal Miners Provident Fund and Miscellaneous Provident Act (1948)

● Facilitating access for members/dependents/employers as to the current status of claims and account balances

● Providing regional administrative budgeting (plan values), including actual recording and reporting

● Providing income and expenditure and the balance sheet for social security

Note: During the implementation, CMPFO had specific pension liability computation and subscriber requests/claims management process requirements that were addressed through collaboration and custom development efforts with SAP.

The entire value chain can be broadly broken into four specific process areas. These are the registration process (employee-employer relationship), reconciliation process (mismatches with the banks), collections and disbursement of money upon retirement, and the loan application process. In addition to the areas covered in the previous bullet points, SAP had to ensure it could address these four key processes that underpin the CMPFO.

Timel ine

Figure 3 presents the project timeline.


F I G U R E 3

C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n / S A P P r o j e c t T i m e l i n e

August 2006 � end-user training and data migration and go live in three pilot locations

January 2006 �project launch

June 2005 � began evaluation process

2006

December 2005 �signed with SAP

September 2006 � five more regions go live

2005

October 2006 � HR solution going live

November 2006 �remaining regions and XI (Exchange Infrastructure) go live

August 2006 � end-user training and data migration and go live in three pilot locations

January 2006 �project launch

June 2005 � began evaluation process

2006

December 2005 �signed with SAP

September 2006 � five more regions go live

2005

October 2006 � HR solution going live

November 2006 �remaining regions and XI (Exchange Infrastructure) go live


Business Benefits

Upon completion of the SAP implementation, CMPFO will become India's first social sector organization to be fully computerized, complete with a modern ERP system. Table 5 outlines a few of the early project benefits.

Note: As additional investments are made and the CMPFO moves beyond these initial stages, further benefits should be realized. At this point, the organization is not able to provide formal metrics.


T A B L E 5

P r o j e c t B e n e f i t s o f t h e C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n I m p l e m e n t a t i o n

Benefit Description

Processing time The project has resulted in a significant reduction in processing time. It used to take three to four days to process applications and match responses, as the CMPFO officers previously managed this process manually. Now, this is instantly routed through the information systems.

Miner access In the past, miners had to go to the CMPFO offices to access information/data and submit requests and applications. Now, miners can access this information from their workplace (i.e., in the mines).

Accuracy Because the previous processes were manual and involved multiple steps, errors were common. With the new systems and increased automation, they have been greatly reduced.

Transparency The move to computerized systems with formal data management processes and audit trails has greatly increased visibility and control.

Efficiency Improvements in processing, disbursements, customer service, etc., have resulted in major efficiency gains across the entire value chain.

National model The success of this project is serving as an important model for change in India's PPF industry. It will also have ramifications in other countries, which are looking to reform their own native PPF systems.


Challenges and Lessons

A project of this nature is not without its challenges, and these are worth covering in some detail. Table 6 describes some of the more salient ones.


T A B L E 6

C h a l l e n g e s F a c e d D u r i n g t h e C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n I m p l e m e n t a t i o n

Challenges Description

Change management The introduction of new systems, technology, and workflow led to resistance by staff. The steering committee and implementation team devoted considerable time and effort to educating and involving staff at various points in the project. The benefits of computerization had to be actively sold to the various stakeholders. Structured training programs lasting 10 to 15 days were established at three centers in each of three regional locations.

Networking and connectivity The regional offices are located in remote mining areas. This led to challenges around establishing direct connectivity with the coal companies, data retrieval, and the provision of online services. Connectivity also had to be established with the banks to facilitate disbursements and to structure and manage the flow of information into and out of member accounts via the CMPFO's information systems.

Data issues Member data had not been kept updated, and much of it still remains in a nondigital format. In addition to significant data cleansing work, efforts are still being made to ensure data availability for migration to the SAP systems. As the CMPFO is reliant upon member data provided by the coal companies, there are additional challenges in terms of bringing them into the project.

Organizational buy-in A key challenge was ensuring buy-in from the various stakeholders to accept the new processes, systems, and technology. CMPFO management had to first convince internal staff of the merit of its approach and then take the project to the external parties. This required campaigns to create public awareness and assuage community concerns.

Resistance Resistance appeared in the form of harassment and violence. During campaigns, banners were torn and stones were thrown at the campaigners' vehicles. Disgruntled parties who felt threatened by the project organized and planned much of this resistance.


Future Plans

The CMPFO has come a long way since it began the project, but the commissioner is committed to further reforms. These include the following:

● Increasing automation and introducing better control systems to improve efficiency and transparency

● Continuing change management efforts to better improve communication with subscribers


● Improving the ability of subscribers to gain anytime access to their full account details

● Building expertise around fund management administration (currently outsourced) to improve funds disbursement, claims settlement, etc.

● Classifying and digitizing documents (including historical documents) and thus reducing the amount of unstructured content in the value chain

A B r i g h t F u t u r e

PPF reform is on the agenda of most countries in Asia/Pacific, and the introduction of technology is likely to make this task easier and more predictable. Countries with effective systems continue to innovate, while those with nascent PPF industries are studying best practices and beginning to invest. These are positive signs for the long-term health of the region and also hint at a bright future for asset managers, who will be the ultimate benefactors.

Table 7 provides rough estimates for pension assets under management across nine regional economies. These do not include insurance company assets and focus primarily on the largest occupational pension schemes. Thus stated, the potential growth is phenomenal, especially in the developing economies. Although not included in this table, it is important to note that countries like Vietnam, Indonesia, Pakistan, the Philippines, and Malaysia further bolster this total and are also primed for rapid growth rates akin to their developing economy peers.

China, India, South Korea, and Taiwan are the star performers in terms of percentage growth, but Australia, Hong Kong, and Singapore show that even mature PPF markets still have significant potential. Considering the future economic might of Asia and the relatively low penetration of asset management providers, the opportunities are considerable for well-positioned players.


T A B L E 7

P e n s i o n A s s e t s U n d e r M a n a g e m e n t b y S e l e c t e d C o u n t r y , 2 0 0 4 a n d 2 0 1 5 ( U S $ B )

2004 2015 2004�2015 Net Increase 2004�2015 CAGR (%)

Australia 522.4 1,889.5 1,367.1 12.4

China 8.2 133.4 125.2 28.9

Hong Kong 39.2 111.0 71.8 9.9

India 4.8 160.6 155.8 37.6

Japan 753.7 887.9 134.2 1.5

South Korea 31.1 272.3 241.2 21.8

Singapore 68.1 122.7 54.6 5.5

Taiwan 2.7 97.6 94.9 38.6

Thailand 8.0 32.6 24.6 13.6

Total 1,438.2 3,707.6 2,269.4 9.0

Notes: This is a rough estimate and is arrived at by concentrating on the most important private pension schemes. The focus is on occupational pensions because they are most likely to be managed by asset management companies. Assets of insurance companies are not included.

Source: Allianz Global Investors, Allianz Group Economic Research, 2005

E S S E N T IA L GU I DA N C E

Asia/Pacific is enjoying a sustained period of rapid economic growth coupled with favorable near-term demographics. Growth, however, can slow, and a demographic windfall today will gradually become the burden of tomorrow. For this reason, governments are actively seeking ways to secure their nations' futures, and PPF reform is the end result. We believe that information technology and outsourcing will play central roles in this reform process, although the models, strategies, and paths will differ.

In this report, two case studies have been presented, and each offers lessons for other markets. In India, CMPFO is taking its first steps to become a modern, transparent entity for the benefit of its members and the broader society. The PPF industry in India is itself quite immature, and it is unclear how it will evolve over the coming years. While the


government contemplates this reform process, key market players like CMPFO are moving ahead with their own reform activities. We believe this model will be replicated in other developing economies. Members will push their PPF provider to reform, even if the government has yet to overhaul the broader sector.

In Australia, there is a mature industry facing challenges of a different nature. The introduction of member choice and increased government oversight has led to greater complexity and higher costs for PPF providers. As a result, industry players are rethinking traditional models, and Russell has undertaken a unique project with IBM. For Russell, it is about true business transformation outsourcing, while IBM is keen to create an industry utility. As IBM's utility builds volume, individual firms like Russell will benefit. This type of win-win arrangement has never been tried in the PPF industry and has the potential to serve as a model for countries across the globe.

A c t i o n s f o r F i n a n c i a l I n s t i t u t i o n s

● It is important to remain abreast of PPF industry developments in other countries. These will provide indications about future trends and, more important, possible solutions to future challenges.

● Regardless of the current maturity of the PPF industry, there are a large number of common, noncore processes that might be suitable for outsourcing, either to a third party or to an industry-owned utility. These are worth exploring either individually or within an industry body.

● For individual PPF players, information technology can be leveraged across a range of areas, from increasing efficiency and automation to improving customer service and transparency.

● Demographic trends portend a difficult future for many citizens and governments. Often hampered by political infighting, they may require guidance and leadership from financial institutions. This will necessitate cooperation and industry consensus to present a common front to governments.

A c t i o n s f o r V e n d o r s

● The PPF industry has not benefited from the same surge in new technologies and service providers that are found in the banking and capital markets space. Vendors and service providers have a clear opportunity to innovate and bring to market new solutions.

● In many Asian markets, the PPF industry is still quite immature. This requires a consultative, patient sales approach that may not


generate returns in the near term. Selling in developing Asia is about education and commitment.

● The success or failure of IBM's utility in Australia will be an indication of the future potential of this model. If other providers are keen to follow suit, they should focus on a specific market and commit themselves for the long haul. The initial intention should not be to set up a pan-regional or global utility, since that may run afoul of regulatory restrictions. Rather, the utility should have sufficient domestic growth opportunities to sustain itself in the near and medium term.

● Since PPF reform will require more than just a software solution, it is important for vendors to partner. Beyond hardware, SI, networking, and database, there will be requirements for strategic consulting, financial and managerial accounting, business process reengineering, imaging and workflow, CRM, HR, and other application areas.

L E AR N MO R E

R e l a t e d R e s e a r c h

● Wireless Insurance Strategies: The Pursuit of Further Innovation (Financial Insights #FIN203745, October 2006)

● Being in the Moment: Improving Insurers' Decision Making Through Real-Time Analytics (Financial Insights #FIN203633, September 2006)

● Insuring Asia's Future Online � The Changing Face of eInsurance (Financial Insights #FIN201956, June 2006)

● Bancassurance in Asia/Pacific: Embracing Alternative Distribution Channels (Financial Insights #FIN1746, March 2006)

A p p e n d i x : C l a r i f i c a t i o n o f P a y - A s - Y o u - G o a n d F u n d e d P e n s i o n s

Explanatory Note

Interested readers are encouraged to do further research on the various PPF topics covered in this report. In the following sections, we provide further clarification on two concepts touched on earlier: PAYG and funded pension schemes.


Pay as You Go Versus Funded

PAYG refers to an unfunded system in which current contributors to the system pay the expenses for the current recipients. In a pure PAYG system, no reserves are accumulated and all contributions are paid out in the same period. The opposite of a PAYG system is a funded system, in which contributions are accumulated and paid out later (together with the interest on it) when eligibility requirements are met.

Social security in the United States is an example of a PAYG system. The currently employed population contributes to the system in the form of a payroll tax (also called Social Security Tax), while the recipients are mostly individuals of at least 62 years of age. Social security is not a pure PAYG system because it accumulates excess revenue in so-called trust funds.

These kinds of PAYG systems can be implemented quickly because no reserves are necessary to finance the expenses of the first generation of recipients. However, the gains of the first generation have to be financed by following generations. This will eventually lead to a situation where the last generation may have to finance its own expenses and that of the preceding generation.

Net Burden on Society

In a funded system, contributions are used to purchase assets that finance benefits upon retirement. The average rate of return that participants receive on their contributions in a funded system is the average rate of return on those assets. That is equivalent to the rate people could earn if they saved the money themselves rather than contributing it to the system. Therefore, in general, a funded system does not affect the average financial resources available to any generation.

By contrast, in a PAYG system, the average rate of return � and therefore the effect of the system on generations' financial resources � can differ widely for different generations depending on whether they face stable or changing tax and benefit rates. The changing size of the tax base � reduced labor earnings due to an aging population, for example � will consequently have a major impact on the sustainability of the system.

A final point to note is that transitioning from a PAYG system to a funded pension scheme can be very expensive and falls on current generations to finance. This is not a popular proposition and might require the alternative of debt financing. As a number of PAYG schemes exist � in Japan, the United States, etc. � this is an important consideration as working-age populations shrink.


C o p y r i g h t N o t i c e

Copyright 2006 Financial Insights, an IDC company. Reproduction without written permission is completely forbidden. External Publication of Financial Insights Information and Data: Any Financial Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate Financial Insights Vice President. A draft of the proposed document should accompany any such request. Financial Insights reserves the right to deny approval of external usage for any reason.

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