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Leaving legacies behind

Providers are recognising the importance of upgrading their back-end systems in order to compete in a one per cent stakeholder world. Ming Liu examines what it takes to get past legacy systems

The challenge facing established pension providers, whose back-end architecture is based on legacy systems, is that to keep up with new requirements, these systems need upgrading. However, do they carry on patching up these systems with short term ‘bandage’ solutions, or do they trade the ageing system in for a completely new one? With e-commerce placing emphasis on technological capability, it could be time to opt for the latter, if they have the money.

To understand how dated some systems are, consider that legacy systems are typically based around mainframe computers, the central host computer. It effectively holds all the intelligence of the system. Users use their terminals to access the mainframe and alter data held there. Today’s systems are based on a more efficient client-server structure. The desktop PC acts as a client, accessing the central server database for files. The difference being that the PC now holds some of the intelligence as well. Users can use the applications held on their PCs to modify or access data, no longer needing to be linked into the server to do so.

Mainframe programmers designed bespoke IT applications to meet specific needs of the pension provision process. Systems were thus made up of hundreds of different applications running on different platforms. These applications were made using dated computing languages like COBOL. As time passed programmers with sufficient knowledge of how these systems worked were increasingly rare. Moreover, it was difficult to transfer data across numerous applications, as they all operated on different ‘closed’ platforms.

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Malcom Reynolds, director of marketing and strategy at Profund Systems Limited, comments: “It is difficult to manage [legacy systems] as technology moves on. For example every pension scheme needs changing at least annually... increasingly there are also problems integrating with payroll and personnel packages.” These change rapidly as well, adds Reynolds: “some companies have hundreds of different systems that do different things”. The solution is to integrate the numerous systems into one; to create a single platform upon which all applications can operate and interact seamlessly.

Systems can now achieve this common standard as most applications use object oriented technology. This commonality, also known as open systems, is achieved by using components. The idea is that all applications should be built using component-based technology. It is like using lego bricks to build everything. It doesn’t matter if your bricks are yellow or green, they all still fit together. Examples of new ‘open’ and standardised systems include Oracle, as well as Microsoft NT, and Unix, to name a few.

By using component-based systems, upgrades and add-ons are easier, as most applications use the same platform standard. This eliminates the incongruity that characterised legacy systems.

The seamless integration of the applications increases efficiency and effectiveness with user friendly designs. Integrating the systems also leads to a process of deskilling the tasks, eliminating the need for extensive training. Reynolds says: “There is a shortage of pension professionals in the industry so you need to try and deskill the platform. By using the latest technology, you are deskilling the job so that even a young school leaver can run the new systems.”

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Another advantage involves an important change in the business model, pushing through the idea of self-service. Why train people to upgrade the policy holder’s records, when the customer can do it themselves? If you integrate the front- and back-office applications, users can access their data through front-end interfaces and modify their own records on back-office systems. Integration also facilitates customisation and expansion by producing applications that can be easily adapted or added to the client’s existing systems.

Stakeholder catalyst
The growing take-up of internet access and e-commerce in addition to the government’s recent introduction of stakeholder pensions has pushed online transactability to the forefront of the pension provision industry. Yet in the one per cent world, the ceiling on commissions is so low that pension providers will find it hard to make a profit. Mike Lusby, executive consultant at Compass Management Consulting, says: “It could take eight to eleven years before stakeholder pensions will be profitable. Most companies need to reduce costs by up to 40 per cent to compete in this environment.”

An effective way to reduce these costs is to web-enable the provision of stakeholder pensions. It would eliminate a lot of overhead by bypassing the need for people while at the same time a web-based pension administration process will promote the idea of self-service. Customers can access their records through an online browser and update them accordingly.

The pension provider is now faced with two options. Design a new open platform system, that allows for provision of stakeholder pensions and other new policies while existing policies are moved over to this new system. Ultimately, the provider ends up with a fully integrated online pension provision service.

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An example of a start-from-scratch integrated solution is oPen, by Profund. At the core of the oPen package is the component object model (COM) that facilitates network expansion. The company uses industry standards, Microsoft Visual Basic for Applications as the programming language to design the package and Microsoft Structured Query Language to build and maintain databases on a server.

Alternatively you could tack on a web-enabled system for stakeholder pensions, and continue using legacy systems for existing policies. The front- and back-end systems are still separated, making this a superficial solution as the advantages of both are lost. Lusby says: “It is very difficult to take the mainframe into the one per cent environment. You need to embrace e-commerce. You lose the architecture if you put a web-based system into a legacy system.”

All signs seem to point to integration, but the challenges of integration can be off-putting. For example, the migration of data from old to new systems is time consuming and expensive. The integrity of the old data must be checked beforehand. As Lusby notes: “There are companies that still write to people who have died years ago.”
But most importantly, the integration and installation of a brand new system is expensive. Lusby cites a company that recently bought a systems package for £23 million.

Moreover, the cost must be justified, and return on investment realised quickly. Michael Whitfield, managing director at t-bx, an e-commerce consultancy, argues: “Insurance companies are fuelled by new business, not by servicing legacy business. As more companies are privatised, there is more pressure on profits. What’s in it for them to integrate legacy systems?”

Those looking long-term to recoup their costs, particularly in the stakeholder market, may also be mistaken. There are currently 47 stakeholder schemes registered with OPRA. “Within two to three years, there will be only five or so suppliers,” says Payten. The reason being that, stakeholder pensions offer so little scope for profitability and only a provider with large market share will generate profit. The big fish are already starting to eye up the little ones. It may already be too late to integrate old technology with next generation systems.

– Pensions Age August 2001–

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