FIN_Pensions and Provident Funds - Leveraging Technology to Secure Asia's Future1

October 2006, Financial Insights #FIN204044
Financial Insights: Asia/Pacific Banking Advisory Service: Case Study
Pensions and Provident Funds:
Leveraging Technology to Secure
Asia's Future
A s i a / P a c i f i c B a n k i n g A d v i s o r y S e r v i c e
A s i a / P a c i f i c I n s u r a n c e A d v i s o r y S e r v i c e
CASE STUDY #FIN204044
Douglas Jaffe Shawn Yip
F I N A N C I A L I N S I G H T S O P I N I O N
The future of Asia's economic dynamism is dependent on the policies
it enacts today to address an expected shift in demographics and a
move to a more gradual growth path. Population aging has the
potential to reduce the living standards of an entire generation. To
counter the impact of this inevitable change, governments must focus
on reforming their pension and provident fund (PPF) industries.
Information technology and outsourcing are two powerful tools for
assisting in these reform efforts. Already, we are starting to see
examples here in Asia that can provide lessons and guidance for
countries all across the world. In addition:
● There is a clear need for further reform in PPF industries across
Asia, especially in the developing economies. These investments
are required to improve efficiency, transparency, and governance
and to meet the increased demands of both members and
regulatory bodies.
● Opportunities exist for the outsourcing of noncore processes and
other functions common to all PPF market participants. There are
regulatory hurdles to overcome in each market, but it is time for
service providers and industry players to begin discussions.
● There is a clear market demand for PPF applications that leverage
new technologies and integrate better with other key solutions and
processes.
● Regulators and PPF governance bodies need to focus more
attention on the technology and process side of the industry they
oversee. It is imperative they remain abreast of technology changes
and the impact of outsourcing if they are to regulate wisely and
with sufficient prescience.
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#FIN204044 ©2006 Financial Insights, an IDC Company
T A B L E O F C O N T E N T S
P
In This Report 1
Brief Description of the Situation............................................................................................................... 1
Situation Overview 2
A Change Is Occurring ............................................................................................................................. 3
Future Outlook 4
Russell Investment Group ........................................................................................................................ 4
Coal Mines Provident Fund Organization ................................................................................................. 12
A Bright Future.......................................................................................................................................... 18
Essential Guidance 19
Actions for Financial Institutions ............................................................................................................... 20
Actions for Vendors .................................................................................................................................. 20
Learn More 21
Related Research..................................................................................................................................... 21
Appendix................................................................................................................................................... 21

©2006 Financial Insights, an IDC Company #FIN204044
L I S T O F T A B L E S
P
1 IBM Investment Initiatives ............................................................................................................ 9
2 Benefits for Russell ...................................................................................................................... 10
3 Benefits for IBM............................................................................................................................ 11
4 Future Challenges and Concerns................................................................................................. 11
5 Project Benefits of the Coal Mines Provident Fund Organization Implementation ....................... 16
6 Challenges Faced During the Coal Mines Provident Fund Organization Implementation............ 17
7 Pension Assets Under Management by Selected Country, 2004 and 2015................................. 19

L I S T O F F I G U R E S
P
1 Asia/Pacific Demography: Old-Age Dependency Ratio by Selected Country, 2005 and 2050..... 3
2 Russell/IBM Project Timeline ....................................................................................................... 9
3 Coal Mines Provident Fund Organization/SAP Project Timeline.................................................. 15

©2006 Financial Insights, an IDC Company #FIN204044 Page 1
I N T H I S R E P O R T
B r i e f D e s c r i p t i o n o f t h e S i t u a t i o n
In many respects, the countries of Asia/Pacific are in the midst of an
economic golden age. Strong growth, low inflation, and an acceptance
of market-oriented development contribute to the region's success,
while demographic factors continue to favor most nations. Young
populations coupled with strong support for education provide a solid
foundation for growth. To be sure, there are countries with impending
population time bombs, but generally speaking, this is a good time to
be in Asia.
Governments, primarily in the mature economies, do not take these
good times for granted and have created or encouraged the
development of PPF industries. These are intended to mitigate the
impact of economic downturns and ensure that citizens enjoy a degree
of security throughout their lifetimes.
While commonplace in the West and in a few mature Asian
economies, the majority of countries, especially those in developing
Asia, have only just begun to establish these systems. Even where they
exist, they are primitive and plagued by inefficiency and are unsuitable
for providing long-term security. Coverage levels remain low and
often only extend to specific groups — government workers or
specific industries. Considering that golden ages never last, this is a
concern.
With the reduction of government guarantees — China's Iron Rice
Bowl, for example — there is an urgent need to create structures to
provide this vital function. In addition, the traditional family network
is being replaced by a more urban society with fewer children and a
consequent reduction in the levels of family support. Even in places
where rudimentary PPFs exist, there is a need for reform and further
investments to improve efficiency and introduce transparency.
Building a sustainable and viable PPF industry is a vital part of a
healthy economic future and is increasingly a priority for Asia's
governments.
Information Technology and Outsourcing
It is not the place of this report to discuss the legal or regulatory
aspects of building or reforming the PPF industry. Rather, this report
looks at two increasingly important components of all PPF strategies:
information technology (IT) and outsourcing. These are being
employed to improve efficiency, increase choice, and introduce a
greater degree of accountability, control, and transparency.

To highlight the importance of these two areas, we present two case
studies from completely different ends of the PPF spectrum. The first
is from Australia, one of the world's most sophisticated PPF markets,
while the second is from India, a market taking its first steps toward
PPF reform. Both highlight important industry trends and are relevant
to markets across the world.
S I T U A T I O N O V E R V I E W
Good times do not last, and nowhere is this more evident than in the
demographics underpinning Asia/Pacific. Figure 1 presents old-age
dependency ratios — the ratio of those 65 years old and older to those
in the 15- to 64-year-old range — for nine countries across the region.
As 2050 approaches, the situation will become increasingly dire for
the mature economies of Korea, Japan, and Taiwan. Even though
China, Thailand, and India will have more favorable ratios, they are
not far behind. More important, though, they lack the resources of their
richer peers to handle this transition — lower per-capita GDP — and
this is a concern.
Figure 1 highlights a very real problem for all regional economies and
underscores the importance of creating a sustainable PPF industry.
While not included in the above figure, countries like Vietnam,
Indonesia, Pakistan, the Philippines, and others exhibit similar traits
and will face similar challenges in the decades ahead.
These developing countries are the ones that matter. At the end of the
day, Australia, Hong Kong, and Singapore are far better equipped to
manage their population transitions. The real challenge will lie in the
rest of the region, which is home to the vast majority of Asia's
population. How governments in these markets react to these
demographic trends will be the key determinant of future economic
sustainability.

F I G U R E 1
A s i a / P a c i f i c D e m o g r a p h y : O l d - A g e D e p e n d e n c y R a t i o b y
S e l e c t e d C o u n t r y , 2 0 0 5 a n d 2 0 5 0
22.2
34.6
38.9
49.4
55.9
58.3
63.8
66.6
69.4
8.4
10.2
12.0
19.4
11.8
16.3
13.4
30.0
12.6
0 10 20 30 40 50 60 70 80
India
Thailand
China
Australia
Singapore
Hong Kong
Taiwan
Japan
South Korea
(%)
2005
2050
Source: Allianz Global Investors, Allianz Group Economic Research, 2005
A C h a n g e I s O c c u r r i n g
Although the pace of reform differs greatly across countries, there are
a few noteworthy trends. The patchwork of PPF coverage in Asia
includes a mix of pay-as-you-go (PAYG) systems with funded
pensions. Some countries have obligatory PAYG systems
supplemented with funded pensions, while others operate structures
that combine both PAYG and funded pension elements. (Please refer
to the Appendix for a more detailed explanation.)
While the landscape appears quite diverse, there is a clear shift toward
the funded pension, and reform efforts in many developing economies

are moving in this direction. There is also a move away from defined
benefit schemes in favor of defined contributions. This is an important
shift and is in line with a growing acceptance of allowing individuals
greater choice in terms of how they plan for their own retirement. This
means increased freedom to decide how these assets are invested, as
well as new regulations that permit accounts to be transferable when
individuals change employers.
From a coverage perspective, the situation is not ideal but improving.
With few exceptions, coverage in most Asian markets remains quite
low. Even in Korea, which faces a daunting demographic future,
coverage is less than 40%. China, India, and the other developing
countries have far lower coverage figures, and often the coverage that
exists is for specific groups — government officials, work
collective/corporation, industry unions, etc. Increasing coverage is a
priority for all governments, but the rates lag significantly behind most
industrialized countries.
Reform is certainly occurring and remains a stated priority of all
regional governments. How they undertake these reforms depends on
national conditions, but a common, yet poorly understood, component
is around the technology and processes. New technologies and
outsourcing strategies not only are critical to any and all reform efforts
but also have the potential to help governments meet their stated
objectives. Going forward, we expect the PPF industry will follow its
banking and capital market peers and embrace IT-led strategies as a
central part of transformation.
F U T U R E O U T L O O K
In this section, we present two case studies highlighting the growing
importance of technological innovation and outsourcing to reform
efforts in the PPF space.
R u s s e l l I n v e s t m e n t G r o u p
Founded in 1936, Russell is a global investment services firm offering
investors a comprehensive suite of investment and actuarial solutions.
A subsidiary of Northwestern Mutual and headquartered in Tacoma,
Washington, it has offices throughout the world. Russell adopts a
"multiasset, multistyle, and multimanager" approach to its global
investment strategy.
In Australia, Russell offers its flagship SuperSolution, which is made
up of two core elements: Russell MasterTrust, which serves as a
default fund for superannuation contributions for Russell's members
under administration; and the Russell ChoiceSolution, which provides
a comprehensive set of support services. Russell's master trust product
has approximately US$14 billion in assets under administration.

The Superannuation Industry
Superannuation is money saved during an employee's working life to
provide an income after retirement. It is part of Australia's Three Pillar
System for retirement savings that includes:
● Compulsory superannuation
● Voluntary savings
● Government pensions
Compulsory superannuation contributions, first introduced in 1992,
ended the dependence on the government-funded social security
pension. This means that employers are legally required to contribute a
sum (also known as the superannuation guarantee) for employees into
a complying superannuation fund or retirement savings account at
least every three months. This mandatory contribution amount for
employers is calculated as a percentage of the employee's ordinary
time earnings (OTE), with the percentage being raised from 3% to 9%
between 1992 and 2002. Voluntary contributions are also encouraged
through the Super Co-contribution scheme, in which the government
matches eligible personal contributions with a co-contribution up to a
limit of A$1,500 annually.
Superannuation contributions are typically categorized into retail,
industry, or corporate funds, depending on the scope, and are managed
by trustees charged with ensuring that the funds are invested
prudently. These are retained until the employee reaches the age of 55,
when they can be withdrawn either in the form of a lump sum
payment, a superannuation annuity pension, or a combination of the
two.
Introducing Choice
Having adopted a compulsory yet decentralized PPF model, Australia
is widely regarded as having one of the most sophisticated systems
worldwide. The move toward defined contributions sounded the death
knell for preexisting defined benefits schemes and meant that
companies could no longer rely on benefits offered under company
schemes to be a differentiator in attracting and retaining employees.
A series of measures designed to foster innovation, promote
efficiency, and ensure sustainability in the provision of retirement
savings were rolled out. One of the most significant reforms has been
the introduction of Super Choice in 2005. In response to demand for
greater mobility of funds, members can now choose the funds in which
to park their retirement savings, irrespective of their past or present
employer. This intensified competition in the superannuation sector,
with industry funds opening their doors to the public to compete head-
on with corporate funds. First State Super, AGEST, and Vision Super

are examples of industry funds hoping to broaden their member base
and preserve their assets under management by moving to public-offer
status.
Move Toward Consolidation
The changing demands of an environment that shifted from an
institutional focus — where the primary customer was the corporate
superannuation plan — to one where the individual is the main
customer, led to a proliferation of accounts, where each member had
on average three Super accounts. This resulted in greater complexity in
the back office, with many companies setting up their own pension
departments and administration systems, and invariably meant
increased PPF administration costs, which were passed on to members.
The regulatory environment also placed great constraints on resources.
Funds with more than five members are mandated by the Australian
Prudential Regulatory Authority (APRA) to obtain the Registrable
Superannuation Entity license by July 2006. The licensing process is
time consuming and costly. License applications, with a fee of
A$20,000, have to be thoroughly vetted and accepted by APRA. In
addition, regulations such as the Member Protection Standard, which
ensures that administration costs for small accounts (below A$1,000)
do not exceed investment returns, further increase the cost of
administration.
As a result, more than 75% of the trustees have opted to completely
outsource their fiduciary responsibilities. Smaller funds have merged
in a bid to improve efficiencies, pooling their funds in multiemployer
arrangements known as master trusts. According to APRA, the number
of corporate funds fell from 1,050 in March 2005 to just 646 a year
later, and the number has fallen sharply since then in light of the July
licensing deadline.
With contributions to employees no longer regarded as salaried
expenses, and hence taken off balance sheets, corporate Australia is
rapidly getting out of the day-to-day involvement in the provision of
retirement savings. The introduction of Super Choice, and the threat of
greater mobility of superannuation funds means greater potential costs
and has prompted companies to rethink whether to continue operating
and maintaining pension administration systems in-house or to
outsource.
Business Drivers
In the late 1990s, Russell began offering investment solutions to
companies outsourcing pension investments. To meet corporate
demand for an expanded range of PPF services, Russell undertook a
strategic partnership with Towers Perrin in Australia. Russell
continued to focus on investment solutions, while Towers Perrin

handled back-office processing and administration. Then, in 2004,
Russell took over the firm's operations (managing about 200,000
member accounts) to deliver a more seamless solution for outsourcing
corporates.
Following the acquisition, Russell soon recognized that PPF
administration was a scale game. This meant there was a compelling
case to outsource noncore activities to a third party better positioned to
reap economies of scale. Having already subcontracted unit pricing
and transaction processing for its portfolio of funds to State Street,
Russell looked to do the same with its back-office functions. Adding to
the impetus for change was the cultural dissimilarity of the process-
oriented nature of member administration with Russell's traditional
"knowledge worker" environment.
Decision to Outsource
The changing industry landscape and the realities of the processing
and back-office side of the superannuation business led Russell to
consider outsourcing. The choice of IBM was driven by various
factors, but it is important to note that prior to the acquisition of
Towers Perrin's Australian business, Russell contracted IBM to
conduct due diligence. This gave IBM good insight into Russell's
operations and positioned it well for the future outsourcing contract.
Following an evaluation against global players such as Accenture and
EDS, IBM was chosen to deliver an administrative back office for
Russell's master trust product.
Implementation
Russell's agreement with IBM is a seven-year business transformation
outsourcing (BTO) deal worth approximately US$100 million to take
over the operations of Russell's member administration center in
Sydney, a legacy of the Towers Perrin acquisition. This administration
center handles the processing of member contributions, redemptions,
and transactions. This new business line is handled by a subsidiary
called IBM SuperLife. Key aspects of the deal include:
● In addition to taking over the premises, workstations, and
equipment, 200 of Russell's member administration staff have been
offered jobs with IBM under like-for-like terms and conditions.
● Technology costs and risks are to be transferred to IBM and
reflected as a consolidated monthly payment to the vendor in
Russell's accounting books.
● Russell maintains a small IT team, with the primary
responsibilities of managing the desktop environment, printers, and
ensuring connectivity with Russell's head office. In addition, it has
an in-house vendor management team to oversee the overall IBM
relationship.

● Russell continues to own the customer relationship, but IBM
administers many of the client-facing processes (e.g., call center)
on its behalf.
Project Goals
Russell wanted to outsource its noncore back-office activities to a
provider that would also be responsible for improving the various
workflow processes. It wanted a true business transformation
engagement.
By outsourcing functions such as record keeping, benefit payments,
claims processing, and report generation to a third party with the
ability to scale, Russell hopes to lower the unit costs of administration
while maintaining or improving service standards. The outsourcing of
back-office functions also means a significant risk transfer to IBM and
a shifting of responsibility for a variety of technical and operational
aspects of the business. There is also the accounting benefit as the
agreement moves a large chunk of fixed costs off the books.
Win-Win Agreement
It is important to note that Russell's goals are in line with IBM's desire
to create an industry utility. IBM required an anchor client around
which to build this business and quickly establish a market presence.
The success of the deal thus represents a potential win-win situation
for both parties. As IBM brings on more clients and increases
volumes, the unit costs will go down for all utility members, including
Russell.
IT Investments
Russell's legacy IT infrastructure was made up largely of homegrown
proprietary systems running in a Unix environment. The service
administration center it acquired uses the Superb record-keeping
solution, designed initially to handle complex defined benefit schemes.
To ensure different types of funds can be managed on the existing
infrastructure regardless of the underlying application, IBM is looking
to build a front-end application layer.
Table 1 details the key investment initiatives, as laid out by IBM.

T A B L E 1
I B M I n v e s t m e n t I n i t i a t i v e s
Investment Description
CRM IBM will invest in CRM capabilities, with a focus on integrating all customer contact points (call
center, Web, service center, etc.).
Service standards Related to meeting customer demands are planned investments aimed at improving service
standards. These are typically measured by the time needed to verify customer PINs or security
passes, access account balances, and provide visibility into the status of applications and
transactions.
Streamlining operations IBM will invest in remote server monitoring, integration of the Web site with the call center, and
setting up a full-time help desk.
Imaging and workflow Investments in imaging will be undertaken to facilitate document management. A more scalable
workflow system will be rolled out, with the capacity to handle multifold increases in processing
volumes.
Customer access IBM will look to introduce functionalities to improve account accessibility. Legislation permitting,
there are also plans to provide greater choice to members online in changing their fund mix and
moving funds between accounts.
Source: Financial Insights, 2006
Timeline
Figure 2 presents the project timeline.
F I G U R E 2
R u s s e l l / I B M P r o j e c t T i m e l i n e
January 2006 — Russell
signs BTO deal with IBM
July 2005 — introduction of
Super Choice
July 2004 — licensing
requirements for
funds are enforced
August 2004 — Russell’s
acquisition of Towers Perrin’s
Australian operations
March 2006 — IBM assumes control
of the member service administration
center, and staff are transferred over
2005
February 2005 —
launch of Russell
SuperSolution
20062004
January 2006 — Russell
signs BTO deal with IBM
July 2005 — introduction of
Super Choice
July 2004 — licensing
requirements for
funds are enforced
August 2004 — Russell’s
acquisition of Towers Perrin’s
Australian operations
March 2006 — IBM assumes control
of the member service administration
center, and staff are transferred over
2005
February 2005 —
launch of Russell
SuperSolution
20062004

Business Benefits
It is worth noting that although Russell and IBM have distinct agendas,
both have strong vested interests in the agreement. By linking the BTO
contract with a utility offering, IBM is taking an aggressive step to
position itself in the PPF industry, while concurrently servicing an
important industry player. Tables 2 and 3 detail some of the respective
benefits that Russell and IBM hope to see out of the agreement.
Note: As the project is quite new, Russell is unable to provide any
formal metrics.
T A B L E 2
B e n e f i t s f o r R u s s e l l
Benefit Description
Risk transfer The firm has transferred a variety of operational risks to IBM, which will be responsible for meeting
service levels and managing issues related to security, fraud, regulatory changes, new
technologies, and other unforeseeable events that could impact the business.
Cost efficiencies The cost of future investments in technology and process reengineering has been shifted to IBM. In
addition to contractual cost reductions built into the BTO agreement, Russell will also benefit from
further reductions provided IBM is able to increase the utility's volumes.
Service standards In the competitive superannuation industry, service quality will be a key differentiator. Service-level
agreements (SLAs) around uptime, exception handling, processing efficiency, and other related
areas ensure Russell has an efficient, responsive back-office operation.
Cultural alignment Management issues and cultural conflicts stemming from Russell's acquisition of Towers Perrin's
business have largely been resolved with the transfer of operations and staff to IBM.

T A B L E 3
B e n e f i t s f o r I B M
Benefit Description
Anchor client IBM has a strong reference client that can provide credibility and sufficient volumes to justify the
investment. It has created momentum in the Australian market and has established a utility that can
offer services for other PPF players.
Test case IBM has worked on BTO agreements elsewhere in the life insurance industry, but this tie-up
represents its first entrée into the PPF utility space. The deal thus provides a test case from which
IBM can learn and improve.
Market presence The significant number of Russell accounts under IBM's administration management has provided
IBM a platform on which it can quickly build a strong market presence.
Industry first There is the possibility that IBM can expand this business to create a pan-regional or global industry
utility.
Challenges and Lessons
It is still early days, so there is little yet known about the possible
future challenges that will appear over the next six years. Thus stated,
Table 4 outlines some of the potential trouble spots.
T A B L E 4
F u t u r e C h a l l e n g e s a n d C o n c e r n s
Challenge Description
Cost targets Achieving the contractually agreed upon cost reductions while maintaining sufficient margins could
be a challenge for IBM.
Service levels As this is a new endeavor for IBM, there could be challenges around meeting service levels. This
includes upgrades, maintenance, process reengineering commitments, and new application
rollouts.
Regulatory changes IBM is responsible for adapting Russell's systems to any new regulatory mandates. As these are
difficult to predict, IBM risks being obligated to make massive, future investments to comply.
Utility model The long-term value of this BTO agreement with Russell lies in IBM's ability to expand the
engagement and create a true utility. If it is unable to bring on new customers, then that value will
not materialize.

Future Plans
With Russell as its anchor client, IBM now has a platform on which it
can quickly establish a foothold in the market. Going forward, IBM
has targeted an ongoing reduction in the unit costs of administration as
scale increases. To achieve this, it is likely IBM will leverage its
experience in running offshore processing centers in low-cost regions
such as India and the Philippines. Thus, IBM's new utility might
eventually relocate some administration activities — currently located
in Sydney's central business district hub — to further lower costs and
boost margins.
C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n
Established by an Act of Parliament in 1948, the Coal Mines Provident
Fund Organization (CMPFO) is tasked with ensuring the social
security of India's coal miners. It is based in Dhanbad in the state of
Jharkhand and operates across 23 regional offices at 17 locations.
These are generally remote areas located within India's coal belt.
A board of trustees administers the CMPFO and is made up of 21
members from the Union of India and representatives of the central
government (3), state government (6), employers (6), and employees
(6). Within the CMPFO are four administered schemes. These include:
● Coal Miners Provident Fund Scheme
● Coal Miners Pension Scheme
● Coal Miners Deposit Linked Insurance Scheme
The CMPFO has around 600,000 members and serves approximately
250,000 pensioners. More than 20 active coal companies are part of
the system, and this number continues to grow. The CMPFO
administers approximately US$8 billion worth of funds.
How It Works
On a monthly basis, 12% of each coal miner's salary is deducted and is
matched by the specific employer. These funds are remitted to the
CMPFO and then on to IDBI, the organization's bank. An
administrative charge of 3% of the total contribution is levied by the
CMPFO. There are two kinds of benefits payouts: monthly pensions
and a lump sum, which is settled immediately upon retirement. Miners
are able to withdraw advances after an initial subscription period has
passed.
The investment strategy of the CMPFO, as mandated by the
government, is conservative, and the majority of funds are kept in

bank deposits in the government banks. Only 5% of the fund can be
invested in the equity markets.
Business Drivers
Although the CMPFO enjoys a long history in India, many of its
processes and practices were dated and unsuitable for today's
environment. The CMPFO used primarily manual processes and had
limited reliance on information technology. Not only did this hinder
interactions with fund managers, it also encouraged corruption and
inefficiency.
Unions were particularly concerned about the lack of transparency into
the usage and allocation of the miners' funds and demanded
accountability. Related to this issue of transparency were concerns
about the time lag between when funds were remitted every month to
when the annual summary statement was prepared for each subscriber.
This gap provided ample time for errors and other problems to accrue
out of sight of overseers.
CMPFO management was aware of these challenges and had made a
previous attempt to computerize and automate the key processes. It
had originally contracted a local vendor to undertake the project, but
this failed to get beyond the planning stage. This led management to
look for experienced, reputable players with proven methodologies
and track records.
Implementation
Project Goals
With the strong support of B. K. Panda, CMPFO's IT-savvy
commissioner, the fund was keen to leverage technology to address
some of the issues cited above. Automation was an important focus,
and this is evident in the introduction of online claims and settlement,
online status information, and real-time grievance redress. To achieve
these aggressive goals, CMPFO relies on two external providers.
Technology Partners and Solutions
CMPFO is working with SAP and an IT consultant, Webel
Technology Ltd. (WTL). SAP was chosen as the solution provider
following an evaluation against Oracle. CMPFO selected SAP's
Financial Services Collection and Disbursement (FSCD) solution. The
FSCD is an end-to-end solution built on a single, integrated platform
for provident funds, advances, and pension settlement and comes
integrated with financial accounting. It runs on an Oracle database.
IBM is SAP's hardware partner and provided its pSeries Unix servers
through its local partner, Omni Infoword Private Ltd. Omni also
provided some basic hardware, including PCs and training.

The primary site is located in Dhanbad (Eastern India) and is
connected to the 23 regional offices via an MPLS-VPN with IP
telephony and video conferencing. The disaster recovery site is located
in Hyderabad (South India).
The SAP solution covers a variety of areas, including:
● Enrolling new members and maintaining beneficiary details
● Updating monthly member and employer contributions
● Recording, processing, and settling claims for advances, provident
funds, and pension settlements
● Calculating benefits under various schemes stipulated by the Coal
Miners Provident Fund and Miscellaneous Provident Act (1948)
● Facilitating access for members/dependents/employers as to the
current status of claims and account balances
● Providing regional administrative budgeting (plan values),
including actual recording and reporting
● Providing income and expenditure and the balance sheet for social
security
Note: During the implementation, CMPFO had specific pension
liability computation and subscriber requests/claims management
process requirements that were addressed through collaboration and
custom development efforts with SAP.
The entire value chain can be broadly broken into four specific process
areas. These are the registration process (employee-employer
relationship), reconciliation process (mismatches with the banks),
collections and disbursement of money upon retirement, and the loan
application process. In addition to the areas covered in the previous
bullet points, SAP had to ensure it could address these four key
processes that underpin the CMPFO.
Timeline
Figure 3 presents the project timeline.

F I G U R E 3
C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n / S A P P r o j e c t T i m e l i n e
August 2006 — end-user
training and data migration
and go live in three pilot
locations
January 2006 —
project launch
June 2005 — began
evaluation process
2006
December 2005 —
signed with SAP
September 2006
— five more
regions go live
2005
October 2006 — HR
solution going live
November 2006 —
remaining regions and XI
(Exchange Infrastructure)
go live
August 2006 — end-user
training and data migration
and go live in three pilot
locations
January 2006 —
project launch
June 2005 — began
evaluation process
2006
December 2005 —
signed with SAP
September 2006
— five more
regions go live
2005
October 2006 — HR
solution going live
November 2006 —
remaining regions and XI
(Exchange Infrastructure)
go live
Business Benefits
Upon completion of the SAP implementation, CMPFO will become
India's first social sector organization to be fully computerized,
complete with a modern ERP system. Table 5 outlines a few of the
early project benefits.
Note: As additional investments are made and the CMPFO moves
beyond these initial stages, further benefits should be realized. At this
point, the organization is not able to provide formal metrics.

T A B L E 5
P r o j e c t B e n e f i t s o f t h e C o a l M i n e s P r o v i d e n t F u n d O r g a n i z a t i o n I m p l e m e n t a t i o n
Benefit Description
Processing time The project has resulted in a significant reduction in processing time. It used to take three to four days to
process applications and match responses, as the CMPFO officers previously managed this process
manually. Now, this is instantly routed through the information systems.
Miner access In the past, miners had to go to the CMPFO offices to access information/data and submit requests and
applications. Now, miners can access this information from their workplace (i.e., in the mines).
Accuracy Because the previous processes were manual and involved multiple steps, errors were common. With
the new systems and increased automation, they have been greatly reduced.
Transparency The move to computerized systems with formal data management processes and audit trails has greatly
increased visibility and control.
Efficiency Improvements in processing, disbursements, customer service, etc., have resulted in major efficiency
gains across the entire value chain.
National model The success of this project is serving as an important model for change in India's PPF industry. It will
also have ramifications in other countries, which are looking to reform their own native PPF systems.
Challenges and Lessons
A project of this nature is not without its challenges, and these are
worth covering in some detail. Table 6 describes some of the more
salient ones.

T A B L E 6
C h a l l e n g e s F a c e d D u r i n g t h e C o a l M i n e s P r o v i d e n t F u n d
O r g a n i z a t i o n I m p l e m e n t a t i o n
Challenges Description
Change management The introduction of new systems, technology, and workflow led to resistance by staff. The
steering committee and implementation team devoted considerable time and effort to
educating and involving staff at various points in the project. The benefits of
computerization had to be actively sold to the various stakeholders. Structured training
programs lasting 10 to 15 days were established at three centers in each of three regional
locations.
Networking and connectivity The regional offices are located in remote mining areas. This led to challenges around
establishing direct connectivity with the coal companies, data retrieval, and the provision
of online services. Connectivity also had to be established with the banks to facilitate
disbursements and to structure and manage the flow of information into and out of
member accounts via the CMPFO's information systems.
Data issues Member data had not been kept updated, and much of it still remains in a nondigital
format. In addition to significant data cleansing work, efforts are still being made to ensure
data availability for migration to the SAP systems. As the CMPFO is reliant upon member
data provided by the coal companies, there are additional challenges in terms of bringing
them into the project.
Organizational buy-in A key challenge was ensuring buy-in from the various stakeholders to accept the new
processes, systems, and technology. CMPFO management had to first convince internal
staff of the merit of its approach and then take the project to the external parties. This
required campaigns to create public awareness and assuage community concerns.
Resistance Resistance appeared in the form of harassment and violence. During campaigns, banners
were torn and stones were thrown at the campaigners' vehicles. Disgruntled parties who
felt threatened by the project organized and planned much of this resistance.
Future Plans
The CMPFO has come a long way since it began the project, but the
commissioner is committed to further reforms. These include the
following:
● Increasing automation and introducing better control systems to
improve efficiency and transparency
● Continuing change management efforts to better improve
communication with subscribers

● Improving the ability of subscribers to gain anytime access to their
full account details
● Building expertise around fund management administration
(currently outsourced) to improve funds disbursement, claims
settlement, etc.
● Classifying and digitizing documents (including historical
documents) and thus reducing the amount of unstructured content
in the value chain
A B r i g h t F u t u r e
PPF reform is on the agenda of most countries in Asia/Pacific, and the
introduction of technology is likely to make this task easier and more
predictable. Countries with effective systems continue to innovate,
while those with nascent PPF industries are studying best practices and
beginning to invest. These are positive signs for the long-term health
of the region and also hint at a bright future for asset managers, who
will be the ultimate benefactors.
Table 7 provides rough estimates for pension assets under
management across nine regional economies. These do not include
insurance company assets and focus primarily on the largest
occupational pension schemes. Thus stated, the potential growth is
phenomenal, especially in the developing economies. Although not
included in this table, it is important to note that countries like
Vietnam, Indonesia, Pakistan, the Philippines, and Malaysia further
bolster this total and are also primed for rapid growth rates akin to
their developing economy peers.
China, India, South Korea, and Taiwan are the star performers in terms
of percentage growth, but Australia, Hong Kong, and Singapore show
that even mature PPF markets still have significant potential.
Considering the future economic might of Asia and the relatively low
penetration of asset management providers, the opportunities are
considerable for well-positioned players.

T A B L E 7
P e n s i o n A s s e t s U n d e r M a n a g e m e n t b y S e l e c t e d C o u n t r y , 2 0 0 4 a n d 2 0 1 5 ( U S $ B )
2004 2015 2004–2015 Net Increase 2004–2015 CAGR (%)
Australia 522.4 1,889.5 1,367.1 12.4
China 8.2 133.4 125.2 28.9
Hong Kong 39.2 111.0 71.8 9.9
India 4.8 160.6 155.8 37.6
Japan 753.7 887.9 134.2 1.5
South Korea 31.1 272.3 241.2 21.8
Singapore 68.1 122.7 54.6 5.5
Taiwan 2.7 97.6 94.9 38.6
Thailand 8.0 32.6 24.6 13.6
Total 1,438.2 3,707.6 2,269.4 9.0
Notes:
This is a rough estimate and is arrived at by concentrating on the most important private pension schemes.
The focus is on occupational pensions because they are most likely to be managed by asset management companies.
Assets of insurance companies are not included.
Source: Allianz Global Investors, Allianz Group Economic Research, 2005
E S S E N T I A L G U I D A N C E
Asia/Pacific is enjoying a sustained period of rapid economic growth
coupled with favorable near-term demographics. Growth, however,
can slow, and a demographic windfall today will gradually become the
burden of tomorrow. For this reason, governments are actively seeking
ways to secure their nations' futures, and PPF reform is the end result.
We believe that information technology and outsourcing will play
central roles in this reform process, although the models, strategies,
and paths will differ.
In this report, two case studies have been presented, and each offers
lessons for other markets. In India, CMPFO is taking its first steps to
become a modern, transparent entity for the benefit of its members and
the broader society. The PPF industry in India is itself quite immature,
and it is unclear how it will evolve over the coming years. While the

government contemplates this reform process, key market players like
CMPFO are moving ahead with their own reform activities. We
believe this model will be replicated in other developing economies.
Members will push their PPF provider to reform, even if the
government has yet to overhaul the broader sector.
In Australia, there is a mature industry facing challenges of a different
nature. The introduction of member choice and increased government
oversight has led to greater complexity and higher costs for PPF
providers. As a result, industry players are rethinking traditional
models, and Russell has undertaken a unique project with IBM. For
Russell, it is about true business transformation outsourcing, while
IBM is keen to create an industry utility. As IBM's utility builds
volume, individual firms like Russell will benefit. This type of win-
win arrangement has never been tried in the PPF industry and has the
potential to serve as a model for countries across the globe.
A c t i o n s f o r F i n a n c i a l I n s t i t u t i o n s
● It is important to remain abreast of PPF industry developments in
other countries. These will provide indications about future trends
and, more important, possible solutions to future challenges.
● Regardless of the current maturity of the PPF industry, there are a
large number of common, noncore processes that might be suitable
for outsourcing, either to a third party or to an industry-owned
utility. These are worth exploring either individually or within an
industry body.
● For individual PPF players, information technology can be
leveraged across a range of areas, from increasing efficiency and
automation to improving customer service and transparency.
● Demographic trends portend a difficult future for many citizens
and governments. Often hampered by political infighting, they may
require guidance and leadership from financial institutions. This
will necessitate cooperation and industry consensus to present a
common front to governments.
A c t i o n s f o r V e n d o r s
● The PPF industry has not benefited from the same surge in new
technologies and service providers that are found in the banking
and capital markets space. Vendors and service providers have a
clear opportunity to innovate and bring to market new solutions.
● In many Asian markets, the PPF industry is still quite immature.
This requires a consultative, patient sales approach that may not

generate returns in the near term. Selling in developing Asia is
about education and commitment.
● The success or failure of IBM's utility in Australia will be an
indication of the future potential of this model. If other providers
are keen to follow suit, they should focus on a specific market and
commit themselves for the long haul. The initial intention should
not be to set up a pan-regional or global utility, since that may run
afoul of regulatory restrictions. Rather, the utility should have
sufficient domestic growth opportunities to sustain itself in the
near and medium term.
● Since PPF reform will require more than just a software solution, it
is important for vendors to partner. Beyond hardware, SI,
networking, and database, there will be requirements for strategic
consulting, financial and managerial accounting, business process
reengineering, imaging and workflow, CRM, HR, and other
application areas.
L E A R N M O R E
R e l a t e d R e s e a r c h
● Wireless Insurance Strategies: The Pursuit of Further Innovation
(Financial Insights #FIN203745, October 2006)
● Being in the Moment: Improving Insurers' Decision Making
Through Real-Time Analytics (Financial Insights #FIN203633,
September 2006)
● Insuring Asia's Future Online — The Changing Face of
eInsurance (Financial Insights #FIN201956, June 2006)
● Bancassurance in Asia/Pacific: Embracing Alternative
Distribution Channels (Financial Insights #FIN1746, March 2006)
A p p e n d i x : C l a r i f i c a t i o n o f P a y - A s - Y o u - G o
a n d F u n d e d P e n s i o n s
Explanatory Note
Interested readers are encouraged to do further research on the various
PPF topics covered in this report. In the following sections, we provide
further clarification on two concepts touched on earlier: PAYG and
funded pension schemes.

Pay as You Go Versus Funded
PAYG refers to an unfunded system in which current contributors to
the system pay the expenses for the current recipients. In a pure PAYG
system, no reserves are accumulated and all contributions are paid out
in the same period. The opposite of a PAYG system is a funded
system, in which contributions are accumulated and paid out later
(together with the interest on it) when eligibility requirements are met.
Social security in the United States is an example of a PAYG system.
The currently employed population contributes to the system in the
form of a payroll tax (also called Social Security Tax), while the
recipients are mostly individuals of at least 62 years of age. Social
security is not a pure PAYG system because it accumulates excess
revenue in so-called trust funds.
These kinds of PAYG systems can be implemented quickly because no
reserves are necessary to finance the expenses of the first generation of
recipients. However, the gains of the first generation have to be
financed by following generations. This will eventually lead to a
situation where the last generation may have to finance its own
expenses and that of the preceding generation.
Net Burden on Society
In a funded system, contributions are used to purchase assets that
finance benefits upon retirement. The average rate of return that
participants receive on their contributions in a funded system is the
average rate of return on those assets. That is equivalent to the rate
people could earn if they saved the money themselves rather than
contributing it to the system. Therefore, in general, a funded system
does not affect the average financial resources available to any
generation.
By contrast, in a PAYG system, the average rate of return — and
therefore the effect of the system on generations' financial resources
— can differ widely for different generations depending on whether
they face stable or changing tax and benefit rates. The changing size of
the tax base — reduced labor earnings due to an aging population, for
example — will consequently have a major impact on the
sustainability of the system.
A final point to note is that transitioning from a PAYG system to a
funded pension scheme can be very expensive and falls on current
generations to finance. This is not a popular proposition and might
require the alternative of debt financing. As a number of PAYG
schemes exist — in Japan, the United States, etc. — this is an
important consideration as working-age populations shrink.

C o p y r i g h t N o t i c e
Copyright 2006 Financial Insights, an IDC company. Reproduction
without written permission is completely forbidden. External
Publication of Financial Insights Information and Data: Any Financial
Insights information that is to be used in advertising, press releases, or
promotional materials requires prior written approval from the
appropriate Financial Insights Vice President. A draft of the proposed
document should accompany any such request. Financial Insights
reserves the right to deny approval of external usage for any reason.

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