2024 Public Sector Perspectives

Figure 1 – Indicative operation ecosystem of public pension funds Banks Regulators In-house Investment Office Custodian External Asset Manager Custodian Pensioners PPF Employees &Others • Accounts management & data reconciliation • Margin call settlement • Reporting • Sustainability disclosure Contribution/ collections Disbursement/ payments Demand visibility of investments & balances Expenses: • Travel • Financial assistance • Subsidy • Visibility of Liquidity • Reporting • Reconciliation • Reporting Source: Citi PPFs operate in a complex ecosystem (see figure 1) with communications and data flows between multiple stakeholders, including pensioners themselves, banks, custodians, external asset managers and regulators. The data is sensitive, encompassing performance, reporting, data reconciliation, expenses, etc. This can make any systems revamp challenging. However, this complexity also means that the potential rewards available from the streamlining of processes and the introduction of new technology can be sizeable. Administrative costs for PPFs in many territories are growing as a result of trends such as increased early retirement (particularly for people with poor health), as well as pensioners’ calls for greater transparency and an improved customer experience. Most importantly, increased longevity in many countries means there is a steadily growing number of older people receiving pensions, though this varies significantly around the world. Asia is facing a greater challenge from an aging population than the rest of the world, for example (see figures 2 and 3). PPFs operate in a complex ecosystemwith communications and data flows between multiple stakeholders, including pensioners themselves, banks, custodians, external asset managers and regulators. Figure 2 - Countries/territories (with a population of more than 1 million people) with the highest share of people aged 65 and older 1 Source: United Nations Population Division Figure 3 - Proportion of people aged over 60 years old in Asia 2 0 5 10 15 20 25 30 35 40 45 2050 2030 2010 1990 1970 1950 Asia Eastern Asia Australia/New Zealand Southern Asia Central Asia South-Eastern Asia Western Asia Source: United Nations Statistics Division Despite these variations, the demographic direction of travel for all countries is clear. Consequently, the role of PPFs is likely to become greater in the years to come with the imperative to find ways to generate operational alpha ever more pressing. APG Netherlands’ PPFs (alongside those in Denmark – see separate callout box) are considered among the most operationally efficient. Algemene Pensioen Groep (APG), which is a PPF serving pensioners from a variety of sectors, is building an IT system and introducing a new policy and capital administration system. Its approach to this transition contains several aspects that represent best practice, including: • Efficiency is prioritized: IT systems used to collect contributions, pay out pensions and provide annual pension statements are underpinned by agreements with participants; services are provided in partnership with a cloud-based system provider. • Costs are controlled: APG uses cost per participant to assess administration cost efficiency. • Technology is used: APG manages data storage security and decision-making processes based on data and AI. • Service is paramount: APG operates a customer contact center that handles 42,500 inquiries per month. 1 Statista/United Nations Population Division, from https://www.weforum.org/agenda/2023/02/world-oldest-populations-asia-health/ 2 Time-Plot | Line Chart | Data Portal (un.org) ; UNSD—Methodology Citi Perspectives for the Public Sector 51 50 Public Pension Funds: Seven Steps to Operational Alpha