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Extended life expectancy and decreasing birth rates in the developed world are forcing pensions to rethink their operating and investment models. The shift from defined benefit to defined contribution pension plans shifts the onus for retirement planning from corporations and governments to families and individuals. Public and political resistance to much-needed reforms, such as raising the retirement age, lowering state benefits or mandating increased contribution rates, further complicates the pensions landscape.
“It’s not hyperbole to suggest that a strong data foundation is an existential issue for asset owners and managers globally”
From a returns perspective, nominal interest rates at or below zero prohibit asset owners from generating low-risk returns in line with anticipated future liabilities. In the meantime, shrinking public markets, as more corporations delist, are resulting in capacity constraints for pension funds that invest strongly in publicly traded securities and strategies, driving growing asset owner fund flows into private assets that present their own challenges.
New regulations around liquidity risk management and collateralisation of over-the-counter derivatives can add another layer of difficulty. The latest International Financial Reporting Standard, for example, has resulted in the additional recognition of fair value changes that will probably see an increase in the impact of market value on asset owners. As asset owners diversify more of their holdings globally in the pursuit of better risk-adjusted returns, they also will be caught by supra-national regulations such as MiFID II (Markets in Financial Instruments Directive II). Trading errors from stale or inaccurate position data can trigger compliance violations.
As asset owners struggle with these issues, they are looking to their asset managers for innovative solutions. “Against a backdrop of margin compression and competition for asset owner allocations, asset managers need to offer differentiated services, investment insights or seamless access to data,” says John Plansky, global head of State Street AlphaSM, State Street’s front-to-back investment servicing platform for global investment managers, wealth managers, hedge funds, asset owners and insurers. “However, cost-effectively managing these new offerings creates a number of operational challenges for firms constrained by legacy technologies, which are ill-suited to handling complexity.”
Amid these mounting challenges to achieve better investment returns, realise greater efficiencies and deliver more accurate, timely reporting, assets managers and owners urgently need a clear view of cash and positions across the enterprise at any given time. But doing so requires a strong and reliable data foundation, which many don’t have.
For asset managers, differentiating their value proposition to pensions involves offering increasingly sophisticated derivative-based yield enhancement strategies, volatility-capped funds and targeted environmental, social and governance mandates. Cost-effectively managing these strategies and communicating risk and performance on a daily basis to clients requires shared access by asset owners and their managers to a holistic and up-to-date reporting platform.
State Street’s 2020 survey of asset owners confirmed these trends, with more than half of respondents concerned their organisations will lose competitive advantage if they fail to improve data integration. Asset owners polled in the study also noted their challenges with fragmented IT systems that fail to adequately support their investment activities.
“It’s not hyperbole to suggest that a strong data foundation is an existential issue for asset owners and managers globally,” says Plansky. “Without control over and access to their data, pension schemes are potentially flying blind, unable to shift course, leverage new investment opportunities or hedge their liabilities during periods of market turmoil and against long-term trends impacting their beneficiaries.
“Asset managers with trading desks across multiple time zones and geographies require fast and flexible reconciliation as they ‘pass the book’ from region to region, which is increasingly important for pensions allocating globally. Meanwhile, compliance teams need the ability to retrieve and reconstruct historic positions for faster, better-informed responses to regulatory inquiries. Many back-office systems are unable to do this, which forces firms to perform time-intensive manual position reconstruction.”
Liquidity challenges caused by the coronavirus pandemic make real-time views of exposures, cash and holdings even more important. The sell-off in global equity markets during the initial response to the pandemic exposed a number of vulnerabilities facing asset owners that were almost inconceivable previously. When lockdowns and quarantines resulted in sudden mass unemployment, and government mandates permitted members to access retirement savings, pension funds responded by selling equities to raise cash.
“Cost-effectively managing these new offerings creates a number of operational challenges for firms constrained by legacy technologies which are ill-suited to handling complexity”
Recent market turmoil has focused attention on the deficiencies of liquidity sourcing assumptions in asset owner operating models. Reports of external investment managers refusing asset owners’ redemption requests have surfaced, highlighting the unintended consequences of outsourced asset management in a liquidity crunch. Constrained liquidity is further complicated by the opaque and complex fund structures employed by many asset owners involving multiple external asset managers, sub-managers and pooled funds.
With its unified investment management platform, State Street Alpha, the company provides institutional and wealth management firms with a front-to-back asset servicing solution. Alpha lets clients manage any assets in any market and streamline their day-to-day processes, helping to facilitate innovation, better inform investment decisions, optimise returns and improve business operations. Alpha delivers a “single source of truth” across both asset owners and their internal and outsourced asset management teams and asset servicing providers.
Many asset owners managing assets internally will manually transform back-office data into their start-of-day cash and position view, a process fraught with risk and the potential for serious errors. Alpha’s Investment Book of Record and middle-office services provide a highly automated solution to this vexing problem. Meanwhile, State Street’s partnership with Solovis enables clients to calculate performance at every level of a portfolio with all available data points, calculate liquidity on select investments or for their entire portfolio, and analyse exposures across public and private assets.
“The asset management industry is experiencing a major shift,” says Plansky. “Historically, investment data was consumed in the moment. Storing and curating historic data was prohibitively expensive and operationally intensive. Cloud-based data warehouses have shattered that barrier. These platforms capture the volume, velocity and variety of data generated from trading, risk, compliance and portfolio management systems, capabilities that seemed impossible just a decade ago.” Complementary services leveraging both human and artificial intelligence to validate, curate and enrich these disparate data sources enable asset owners and managers to make better and faster data-driven decisions.
Plansky concludes: “The ability to quickly and accurately reconstruct a complete picture at any point in time of cash, positions, exposures, securities on loan and encumbered collateral is a game-changer, enhancing asset allocation and hedging strategies. By providing a real-time, end-to-end view of asset owner and manager data, State Street Alpha enables more profitable securities lending, optimised collateral and cash management, and better-informed corporate actions elections aligned with long-term investment policies and strategic allocations. These are key enablers to confronting the challenges facing pensions globally.”
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