Since 2008, Lumera has helped insurers migrate close to 12 million policies from legacy systems to our Policy Administration Environment. One of the most significant drivers for transforming their core enterprise applications is the need to meet procurement requirements from occupational pension service centers. Enabling automation to streamline administration translates to a lower cost of ownership for customers. For further benefits, our modern technology platform also supports SaaS deployment, or the option to outsource IT operations.
Over the past last decade, the rise in digital customer interaction has added to business needs to transform group servicing operations for providers and pension managers in Sweden’s second pillar (occupational pensions). In 2021, market premiums in this segment totaled SEK 186 billion, with a 20 percent year-to-year growth.
In Sweden, procurements for occupational pensions started in 1998. 927,000 blue-collar workers were then enabled to select their pension provider, of which 600,000 insured decided to stay with AMF and is a traditional insurance offering. The same year, AMF introduced unit-linked insurance as an alternative to traditional insurance.
Procurement procedure has proved highly successful as a tool for reducing fees for the occupational pension providers owned by the Swedish labor market organizations. More collective pension plans for employees in local and regional government, and later national government bodies, have followed suit and initiated procurement processes. Pension managers responded to this challenge by designing products and adapting their business processes for lower costs.
Fast forward, AMF was successful in meeting the requirements in procurements for multiple pillar II plans, including unit-linked and traditional insurance, while expanding their business and offering accordingly. In 2011, AMF launched a new generation of traditional insurance, offering simulated asset rebalancing in target dated funds, with a larger proportion of equities during early accumulation and shifting the balance towards fixed income closer to and during retirement.
Also in 2011, AMF and Lumera converted products and migrated policies for state employees to Lumera’s platform. This project was a rehearsal for migrating the policies of local government employees. Later, we converted and migrated over one million policies in one instance for AMF. These experiences helped us fine-tune methods and workflows for the next big challenge, the migration of 5.3 million AMF policies in 2016. This enabled annual management cost savings of a staggering SEK 300 million for blue-collar workers. According to analyst firm Gartner, this remains the largest single migration project in Europe.
In 2013, Lumera started migrating policies for Folksam and in 2018 for SPP, where we replaced multiple legacy systems in a prudent and controlled way. Our most recent conversions, performed in 2021 for AMF, covered both unit-linked and traditional insurance policies and facilitated decommissioning of their legacy system.
Why migrations are the way forward
- The transition from defined benefit to defined contribution plans is inevitable for multiple reasons:
– Societal change since occupational pensions were introduced. We are entering working life later, working for a shorter time, and live longer lives.
– Persistently low long-term interest rates make it hard to deliver on guaranteed returns
– Benefit managers are looking for predictable pension costs, which is perfectly matched by defined contribution plans.
– Pension reforms will set the pace for the transition. All stakeholders need to relate to the speed and requirements.
- In 1960, defined benefit occupational pensions plans were introduced in Sweden as a part of the salary, managed by non-competing pension providers. Today, occupational pensions are defined as premium plans for employees born in 1979 and later. DB and DC will thus continue to co-exist for many years.
- Traditional insurance or unit-linked – and most likely both. In Scandinavia, employees can choose among multiple pension providers of traditional and unit-linked insurance. Both management styles have their advantages. As employees’ life circumstances may vary significantly, best-of-breed offerings may not always be the best option. For this reason, as well as the complexity of understanding the concept of pension and retirements – markets for advisors have prospered in Scandinavia.
- Cost of ownership is critical for being competitive in procurement. To become a selectable pension provider, contenders must match all procurement criteria. Besides low fees, these include a proven history of high performance for funds in the selectable default portfolio and the traditional insurance portfolio. Sweden has among the lowest fees in Europe, with unit-linked policies offered from 0.08 to 0.23 percent for the default funds, while fees for assets managed for a traditional insurance portfolio range from 0.09 to 0.17 percent.
- Digital interactions with customers and partners in the occupational pension ecosystem are critical for meeting customer expectations, regardless if they are benefit managers or employees.
- Providers facilitating the interaction are looking to platform business models to create value for multiple user types.
- IT solution providers should adopt a long-term view along with business models that support continuous updates as the pensions ecosystem further evolves.
Lumera ensures the future success of our customers by highly automated, high-volume processing of policies, with connectivity to the pensions ecosystem.