Pension System Management Designing the Information System Oleksiy Sluchynsky MENA Regional Workshop in Pension Administration May 2005 osluchynskyy@worldbank.org Company LOGO 1
Topics of Presentation I. System Design & Implementation Planning II. Process Modeling III. Data modeling IV. IT System Implementation and Procurement 2
Part I System Design & Implementation Planning 3
When to Design or Restructure the Pension IT System? Automation of existing processes or Redefining/supplementing existing procedures or Comprehensive systemic reform or Implementation of new scheme 4
Milestones of System Design & Implementation (*) Strategic Planning Evaluate current strategic position Determine future strategic emphasis Align IT system planning with organization strategic planning Assess areas for technological improvements Information System Analysis and Design Construct high-level Process Model Model processes using data flow diagrams Construct global Data Model Analyze data types and formats Analyze user data requirements Design forms, reports, and screens System Implementation Define software and hardware requirements Decide on implementation and procurement options Prepare implementation management plan Allocate sufficient resources for testing and training (*) Based in part on Data Modeling, G. L. Sanders, 1995. 5
Strategic Planning It is all about data Information is money applies literally to the business of a private or public pension scheme With no good records, there is no clear and legitimate entitlement to benefits or assets and no secure retirement Successful pension reform planning should allocate considerable resources to Information System design and implementation 6
Strategic Planning and costs Quality of data comes at costs; Defined Contribution systems are particularly demanding Costs can be mitigated through a full scale process study, system design, and efficient inter-agency cooperation in both implementation and maintenance phases Design or restructuring of the Information System goes hand by hand with analysis and (re-)design of the business process and operations 7
Part II Process Modeling: Topology of Business Process and Institutional Division of Labor 8
System designers need fully understand business process Tasks Institutions Processes What needs to be done? Who is involved? How tasks performed? 9
High-Level Tasks of Pension Administration Registration of Members Registration of Businesses Registration System Collection of Contribution Payments Collection of Contribution Reports Reconciliation and follow up Enforcement Collection System Financial Management Individual Recordkeeping Investment Management System of Administration Benefit Payment Payment System 10
Institutions Involved Civil Register Office Business Register Office (e.g., Ministry of Trade and Industry) Collection Agency (CA) (e.g., Tax Administration) State Pension Administration (SPA) Commercial Banks Central Bank (CB) State Treasury Private Pension Administrators (PPA) Custodian of Assets Private Asset Managers 11
Sample Public Pension Collection System Information Flow Civil Register Office Business Register Office Collection Agency (Tax Administration) State Pension Administration Private Pension Administrators Employer Asset Managers Commercial Banks Collection Account (Central Bank) Custodian of Assets Money Flow State Treasury 12
Sample Matrix of Processes: Registration of Members Institution Process Civil Register Office SPA and/or PPA Collect application forms Verify/correct errors, assign statuses Register new ID number; notify employee Exchange data with SPA and CA Keep updating personal data (marital status, address, etc) Register new members Verify data with the Civil Register; issue notification letters Keep personal data updated 13
Sample Matrix of Processes: Registration of Businesses Institution Process Business Register Office SPA and/or PPA Collect application forms Verify/correct errors, assign statuses Register new Business number; notify the business Exchange data with SPA and CA Keep updating business data (address, sector, status, etc) Register new businesses Verify data with the Business Register Keep business data updated 14
Sample Matrix of Processes: Collection of Payments Institution Commercial Banks Central Bank Treasury Collection Agency Process Collect deposits from businesses and self-employed Collect and register declaration forms Make aggregate transfers to Collection Account Report on transactions to CB and CA Reconcile aggregate deposits with CB Collect payments from commercial banks and credit the collection account Report to CA and SPA Execute instructions on uses of funds Make contribution payment for civil servants Report on contributions to CB and CA Collect and register copies of all declarations and reports from CB and commercial banks Reconcile and follow up on discrepancies Submit processed data to SPA 15
Sample Matrix of Processes: Collection of Reports Institution Collection Agency Process Collect, verify, and process payment declarations Collect detailed periodic contribution reports from employers Do quality check, assign statuses, and follow up with employers Manage data entry and processing of all the reports Generate, distribute, collect, and process error reports Collect and process correction reports from employers Submit processed data to SPA 16
Sample Matrix of Processes: Reconciliation Institution Collection Agency Process Verify that amounts match between: (a) payments and declarations, (b) declarations and periodic contribution reports Identify and follow up on missing payments, missing declarations, and missing reports Generate and distribute notices of discrepancies in payments, declarations, and reports Register and process additional payments and refunds Report with results to SPA 17
Remarks on Reengineering the Reconciliation Process Reforms that introduce Defined Contribution scheme impose very high standards on efficiency of the process and on the quality of data Identifying ownership of assets becomes a major output of the business process of collection and reconciliation Collection and reconciliation procedures sometimes need to be completely redefined and/or re-enforced Given complexities of the new tasks, Collection Agency may soon find itself critically short of resources Nothing can replace the quality reconciliation process but some additional monitoring and check mechanisms may help: Detailed pay-slips provided by employers Double-entry of critical data by CA Verification of reconciliation by SPA Periodic reports issued by SPA to scheme members 18
Sample Matrix of Processes: Enforcement Institution Collection Agency Process Track liabilities of businesses and self-employed Generate and distribute assessment notices Impose penalties Follow up with contribution payers 19
Sample Matrix of Processes: Financial Management Institution Process State Pension Administration (SPA) Private Pension Administrators (PPA) Collect and register all information from CA Reconcile with CB Generate and process error reports for CA and CB Segregate funds of Defined Benefit and Defined Contribution systems Generate instructions on uses of funds Implement transaction audit trail Report to Private Pension Administrators Receive and process information from SPA Reconcile with Custodian Generate and process error reports for SPA Generate instructions on uses of funds Implement proper cost accounting Implement transaction audit trail 20
Sample Matrix of Processes: Investment Management Institution Process SPA and/or PPA, Asset Managers, Custodian Generate and execute investment instructions Keep track of invested funds Account for investment gain/loss Provide and manage multiple investment options 21
Sample Matrix of Processes: Individual Recordkeeping Institution Process SPA and/or PPA Maintain database of participants with information on their contributions, employment history, and benefit payments Collect and process information on new contributions from CA and SPA Keep separate track of employer/employee, mandatory/voluntary components of the contributions Implement mechanism of investment gain sharing among accounts of the members Monitor account balances of individual members Track investment preferences of the members Register and process individual investment option change requests Track individual entitlement to the pension benefit Collect and register information on members beneficiaries Produce and distribute individual account statements 22
Sample Matrix of Processes: Benefit Payments Institution Process SPA and/or PPA Track and verify eligibility of members and their beneficiaries Generate and distribute letters of eligibility notification Collect, register, and process benefit applications Keep record of eligibility types (old age, survivor, disability) Calculate amount of benefit Determine type of payments (annuity, lump-sum, gradual withdrawal) Issue and distribute decision letters Generate payment instructions Allow for benefit, indexation, corrections, and adjustments. Reconcile paid out money with the banks 23
Modeling Processes Data Flow Diagrams (Flow Charts) Schematic logical presentation of the business process in details There are commercial packages to assist with the task 24
Part III Data Modeling: Defining, Classifying, Storing, Relating the Data 25
Categories of Information System Agents (Employers, Members, Beneficiaries, Banks, etc.) Financial Transactions Financial Balances Non-financial Transactions Attributes & Statuses 26
Collecting & Classifying Data Nature of data will define the way data collected, organized, and stored Static Data Collected once and updated with low frequency (e.g., Information on participants, their beneficiaries, businesses, etc.) Dynamic Data Collected or generated on (pre-defined) periodic basis (e.g., wages, contributions, account balances, etc.) Understanding nature of data will help to make database structure more efficient in exploitation 27
Relating & Storing Data Logical Data Model Defines the data that must be stored to satisfy all business requirements Provides description of various data elements Defines relationship between data elements Physical Data Model Specifies how data is physically stored in the database Provides for optimal database performance 28
Exchanging Data Interfaces are Critical Structure and number of interfaces will have important impact on design of the data model Lack of initial clarity on inter-organizational interfaces may considerably increase the risk of delayed system implementation due to constant re-design effort impacting the whole system System designers must be mindful of the operational and IT deficiencies of the external interfacing systems so that the external contingencies, to the extent possible, get incorporated Interfacing components of the database should be structured with the view of functional expandability 29
Part IV IT System Implementation and Procurement 30
Information System Implementation The process should bring together operational and IT specialists. IT is only part of the solution. All operations should be critically assessed. Case teams should be comprised of managers, IT specialists, and those who actually do the work. Internal resources and external expertise must be carefully weighted to identify the available skill set and to optimize implementation strategy. Do survey of existing IT solutions for the same tasks elsewhere and research available commercial products. Define and carefully analyze all risks involved in development and maintenance. Expect unexpected. Be prepared for many contingencies. Implementation is a very time-consuming process. 31
IT Implementation Challenges Implementation of Information Systems is a difficult enterprise US averages: 50% of large implementations fail 80% suffer contract amendments more than half include disputes From presentation of Carlos Ferreira, WB, Procurement of Information Systems and Technology, 2000 32
Common Approaches to Information System Restructuring (*) Reengineering Analyzing, modeling, and modifying an existing organizational system. Downsizing Scaling back the centralized hardware platform and centralized information system department. Migration to local area network (LAN) and client-server architecture. Outsourcing Contracting of various system functions to outside provider(s) of services. System Integration Merging of diverse hardware, software, and communication systems into a new consolidated operating unit. (*) Based on Data Modeling, G. L. Sanders, 1995. 33
Developing IT Solution Outsourcing operations Contracting of various system functions to outside provider(s) of services. No direct responsibility over the processes. Adapting an Off-the-shelf product Customization of already developed commercial product to the business needs. Outsourcing of development Hiring a professional IT consulting company to develop the software or its components. In-house development Mobilizing a team of internal and external specialists to develop system under the internal management. 34
Strategic Considerations Outsourcing operations Adapting an Off-the-shelf Product Outsourcing of Development In-house Development Benefits Advantage of external expertise and capacity May be cost saver due to specialization May be quick and easy Internal exploitation of the system and control over the business process Advantage of external technical expertise Full ownership of the process Fully internalized change function Know how in context, network, needs, users Risks Failure to pay attention to small but critical details of the existing processes or requirements may threaten implementation Exploitation may be associated with high contingent and hidden costs (e.g., requirement to move to new versions) Customization may take more time than expected due to local specifics Maintenance may turn to be expensive High dependency on provider and potential sunk fixed cost It is impossible to specify all the contingencies in the original contract High risk of time and money cost to cover contingencies High dependency on provider and potential sunk fixed cost Shortage of high skill IT and management specialists in public sector Difference in salary between private and public sectors may result in drain of maintenance capacity 35
Procurement Risks (*) Contractual Managerial External Lack of specifications in initial technical requirements Lack of mechanisms of adjustment to changes Ambiguity in acceptance procedures Risk of cost and time overruns Poor management plan and weak enforcement tools Lack of quality control skills and/or effort on the clients side Drifting focus and resources of the IT provider to new projects and new clients Hands-off approach may only delay the crisis while micro management by the client raises the additional liabilities Policy, legal, and regulatory changes Management change Fast technological changes (*) Based in part on presentation of Carlos Ferreira, WB, Procurement of Information Systems and Technology, 2002 36
Conclusions Good quality data and clear processes is a must for a modern social security administration. Well defined systems are particularly critical for the pensions schemes with individual accounts. Well organized information system always pays off. It makes the work more efficient and promotes public trust in the institutions of social security. Information system reengineering, design, and implementation must be "owned" throughout the organization, not just driven by a group of outside consultants. 37
Conclusions System reengineering is about organizational change. Satisfactory dataprocessing will require: Well-defined information channels; Defined and efficient working procedures; Engagement, support, and political will of the management as well as the staff. Implementation project must have a timetable and clear set of responsibilities. Chances of success may be increased if the team of staff and/or consultants engaged in design and development of the new system works as close as possible to the operational units. Shop around before you buy. It pays to learn about solutions in other countries. Sound reengineering/development strategy is as important as sufficient budget. 38