Pensioenfonds Rail & Openbaar Vervoer (Rail & OV, formerly SPF Beheer) is a long-term SkySparc client which manages and administrates the pensions of Dutch railway and public transport workers, investing assets and distributing income to individual pensioners. To improve process efficiency and reduce costs, such as management fees, the firm decided to merge the previously separate two pension funds. Among the many operational challenges was the consolidation of the funds’ assets into a single entity, ‘Rail-OV’. This required consolidation, migration and reconciliation of data in a single entity within the firm’s portfolio management system (Wallstreet Suite), and across Rail & OV’s general ledger and performance management systems.
Merging funds is not a common event, but the challenges were similar to any large-scale migration of multiple positions from one system or entity to another. Success requires accurate, efficient and timely consolidation and reconciliation of data on cash positions, performance and accounting.
Timing presented a further challenge. The migration was started and largely completed during Q1 2020, coinciding with the outbreak of the coronavirus pandemic in Europe, which led to bouts of extreme volatility in the financial markets. Further, remote working made normal levels of collaboration and consultation, eg site visits, impossible.
Under a long-term outsourced support partnership, Rail & OV already relied on SkySparc for a range of ongoing support needs. It uses OmniFi for various regular reporting requirements and often engages SkySparc for large change management projects, including system upgrades and a recent MiFID II compliance project.
Having taken the decision to merge its two core funds, the client asked SkySparc to design and execute a comprehensive project plan for the operational merger, in collaboration with internal staff across the front, middle and back-office functions, as well as accounting.
As independently managed portfolios, the OV and Rail funds had originally been listed within WSS as separate ‘portfolio owners’. The overall plan was to migrate the combined assets/positions and records into the WSS entries formerly occupied by the railway fund, the larger of the two.
The original intention has been to complete the project ahead of the 2020 financial year, with a single fund, supported by consolidated processes and operations. But delays forced Rail & OV to target a 1 April migration date, meaning Q1 2020 data from the two legacy funds would have to be migrated and seamlessly integrated with records for the newly merged fund. This ‘broken year’ caused multiple difficulties. To have an overall picture of the new fund, for accounting purposes, the balance sheet of the old funds had to be transferred to the new fund for this part of the year.
Because the project required such a comprehensive migration from one portfolio owner to another, it was not possible to use WSS’s standard portfolio transfer functionality. Instead, migration tasks had to be executed in a tightly coordinated sequence. Tradeable securities already owned by OV and Rail had to be sold and repurchased by Rail-OV fund; for over-the-counter instruments, such as interest rate swaps and FX, it was necessary to research and select the most suitable migration method. In parallel, three types of data had to be merged, reconciled and migrated over a similar but not identical timescale: cash, performance and accounting.
For both securities and derivatives, workaround solutions were required to ensure that positions were transferred effectively to the merged fund before 1 April. Tradeable securities in the legacy portfolios were sold against the weighted average cost price and then bought back, again at the weighted average cost price, by the new fund, to ensure unrealised gains and losses were accurately recorded for post-migration re-evaluation purposes. For derivatives, manual workarounds consisted of re-opening and resending relevant SWIFT messages for FX transactions settled by CLS and unwinding interest rate swaps. Also, rate monitors were updated to ensure externally-managed mandate valuations were correct. The reconciliation of cash/liquidity data from the legacy funds needed to accurately reflect the cost of carry and cash levels in the portfolio, both for performance purposes and to coordinate with the Rail & OV’s in-house bank.
Most cash position reconciliation was conducted the treasury team, with reconciliation of the OTC derivatives and securities positions conducted by front-office staff. The pandemic lockdown had limited impact, but restrained availability of resources, as front-office staff and portfolio managers often had to focus on handling market volatility rather than participating actively in testing processes.
The final month-end closing for the two legacy funds took place on 6 April, triggering the accounting reconciliation process.
The broken year caused particular difficulty from an accounting perspective, but was resolved by use of a reconciliation report, set up in OmniFi, to match the legacy accounting positions to those for the merged fund. The accounting reconciliation process was conducted via an existing monthly reconciliation report created within OmniFi, using multiple extractions, from WSS’s accounting and treasury & risk modules, as well as Rail & OV’s general ledger. The fact that the report combined so many relevant underlying reports meant it was ideally suited to identify differences and reconcile positions after the merger.
Similarly, as the existing process was for performance data to be fed from WSS to the client’s performance management system, it was necessary to ensure that the performance data from both funds for the first three months was accurately consolidated into the appropriate records of that third-party system.
To ensure the overall process was conducted smoothly, with major issues identified and anticipated in advance, a full dry run was conducted for two weeks from 1 March. This helped to decide on the most suitable methodologies and rules to follow in the live run, from a cash and accounting reconciliation perspective. For example, it helped to decide which historical FX rates to use when transferring positions.
The dry run also helped to decide what corrections were required in order to conduct the final end-of-month closing for the legacy funds, and helped set up the first month-end closing process for the merged fund, to ensure smooth ongoing accounting reconciliations in future. In terms of cash reconciliation, the dry run highlighted the need for a robust process to transfer bank accounts from the old funds to the new one.
The dry run also flagged a number of performance management issues, including the need for accurate attribution for dividends paid out by the legacy funds but settled in the new fund.
Merging its two funds had been a long-term ambition, due to the cost savings and service efficiencies that consolidation would bring to its many beneficiaries. Having overcome significant hurdles, a single Rail-OV fund was established in April 2020, enabling Rail & OV to focus on pursuing greater returns, lower costs and better service to pensioners. Whilst this was a multifaceted project, the data migration project was fundamental to its success.
Despite difficult circumstances – in particular having to deal with the ‘broken’ accounting year against a backdrop of extreme market volatility and an unprecedented public health crisis – the migration project was executed on schedule and on budget, due to careful planning and expertise. SkySparc designed and conducted a highly complex and multi-layered migration project that required a high degree of coordination and deep levels of expertise across trading, portfolio and performance management and accounting. Further, the project had to be conducted almost exclusively on a remote basis, with only one site visit, on 1 April.