2024 Public Sector Perspectives

Below are seven key priorities for PPFs as they seek to achieve operational alpha. Optimize accounts and bank relationships PPFs, especially when making collections or disbursements internationally, often work with multiple financial service providers and manage dozens of bank accounts across multiple countries. In many instances, this complicates account management – and requires extensive manual processes – that reduce efficiency. To improve efficiency, PPFs should seek to consolidate their bank relationships, while ensuring they retain access to credit and maintain valuable relationships. Similarly, accounts should be rationalized where possible to reduce administrative burdens while ensuring that important accounts that might be seldom used (such as those associated with tax payments, for instance) are retained. Improve visibility and control Optimizing bank relationships and accounts will do much to improve visibility and control. However, further gains are possible by bringing together account balance and transaction information across multiple banks in a single online window or statement (using SWIFT messaging, application programming interfaces or, in the future, technology such as artificial intelligence). Centralize and automate An optimized account structure (with improved visibility and control across balances and transactions) can deliver numerous additional advantages, such as the potential to automate activities such as in reconciliation or centralize payments or liquidity management. Many PPFs deal with multiple counterparts when settling margin calls, either directly with banks or through custodians. Centralization of liquidity management can facilitate access to more timely information and improve visibility, enabling optimal decisions when margining settlements, while deploying excess liquidity into short-term investments such as money market funds to generate additional yield. Streamline funds transfer One of PPFs’ most fundamental tasks is the transfer of funds – collecting contributions from workers and disbursing payments to pensioners, both domestically and overseas. As the number of pensioners increases (as described above), and growing numbers retire overseas – especially in Latin America and Western Europe – domestic and cross- border funds transfer volumes will grow. PPFs therefore need to focus on improving operational efficiency relating to the collection and disbursement of funds for pensioners. Fund transfers for operational reasons including grants of financial assistance, subsidies or employee travel needs to be optimized. Focus on the FX requirement for pensioners residing overseas is also important for certain countries. Again, bank relationship optimization and centralization of activities can help to streamline funds transfers. Where possible, digital payment methods should also be deployed to lower costs and improve accountability. Payments should also be automated to eliminate manual processes, which will lower costs and reduce error rates. Improve identity verification Verification of retirement status and proof of life can be time-consuming and complex, particularly for pensioners who live abroad. Logistical challenges when dealing with people in another country can lead to prolonged timeframes to respond to verification requests and increase costs. The application of biometric technologies could improve convenience for pensioners when certifying their identity as well as enabling PPFs to mitigate fraud risks and reduce losses. Leverage data to facilitate external reporting As a service provider to pensioners, PPFs need to issue reports to end users and regulators. Data for these reports largely comes from the PPFs’ banks and custodians. Definitions, regulations and laws are not universally standardized which adds significant complexity to PPFs’ operations in terms of data management and reporting. This amplifies the importance of optimized bank and custodian relationships and account structures that can help PPFs tomore easily compile reports relating to investment performance and risk for pensioners and end users. In addition, there is a growing requirement for sustainability-related disclosure. While in some instances this is a regulatory requirement, many of these demands are currently initiated by younger pensioners (or people contributing to pensions) who prioritize environmental, social and governance (ESG) issues. Indeed, many younger people expect pension funds to invest their contributions in a way that not only generates economic return but also takes into consideration ESG responsibilities. As with bank information, PPFs’ objective in relation to ESG data should be to source high quality, standardized, verifiable and timely data, and store it in a central location so that it is secure but also easily accessible. ATP ATP pays Danish welfare benefits to 88% of the population and is the country’s largest pension fund. Examples of best practice include: Operational Efficiency • A self-governing public benefits administration, Udbetaling Danmark, was created in 2012 to streamline administration, ensuring uniform case processing and supporting Danish citizens’ legal rights. • Centralizing tasks under a single authority at ATP saves DKK700 million annually, or 26% of operating/ administration expenses. • Working with customer advisory services in a systematic way saves ATP thousands of labor hours that can be used for other value-adding tasks and contact with citizens; case processing times for welfare benefit applicants have been significantly lowered, for instance. Digitalization • ATP consistently invests in IT and digitalization and has replaced legacy systems. • New systems are more user-friendly, require less employee training time, use data more effectively and support the implementation of new legislation, and the development and integration of new technologies. • ATP is collaborating with other public sector bodies to develop a coordinated approach that allows citizens and companies to access services in a unified and consistent manner. • ATP ensures the needs of non-digital savvy citizens are met. Indeed, many younger people expect pension funds to invest their contributions in a way that not only generates economic return but also takes into consideration ESG responsibilities . Citi Perspectives for the Public Sector 53 52 Public Pension Funds: Seven Steps to Operational Alpha