Liam Kennedy asked Jonathan Punter and Stuart Southall about their careers as actuaries, entrepreneurs and dealmakers in the world of UK pensions
A two-page business plan, an IBM PC, an unsecured £300,000 loan and the idealism of youth were what propelled Jonathan Punter and Stuart Southall from employment at Duncan C Fraser to the world of independence and entrepreneurship.
Having met at Duncan C Fraser in 1979 as “wet-behind-the-ears actuarial students”, there had been what Punter describes as a “minor revolt of people at our level” after the firm was acquired by William M Mercer in 1986 and the carrot of salaried partnership disappeared: “You think, what have I got to lose,” as he says.
A fair wind brought the first clients – a few from Mercer but others from those the pair had worked with or who had moved on to other organisations. As self-declared “Thatcher children”, Punter and Southall caught the wave of restructuring of British industry in the 1980s and 1990s, negotiating transfer values for mergers and acquisitions.
The rise of their firm, which enjoyed heady annual growth of 20% in the early years after starting in 1988, is also entwined with the rise of private equity, and the pair have worked with the likes of the legendary venture capitalist John Moulton, whose Alchemy Partners narrowly lost out in the acquisition of the now defunct Rover car-maker when BMW disposed of it in 2000.
Since they partly built their business on the back of the rise of private equity, what do Punter and Southall think of the criticism that has been levelled against it in recent years?
“Private equity gets bad press in a number areas,” acknowledges Punter. “But in cases I have seen, some of these businesses would have died if someone hadn’t gone in and sorted them out. Without private equity, the UK would have been in a worse position, but it’s a bit like index trackers – you can’t have private equity owning everything. There has been a resurgence of trade buying recently and, ultimately, value is only ever tested when trade and private equity buy and sell from each other.”
The early days were also the heady days of pension surpluses. “It was all about surpluses and positive cashflows, with mainly active members because deferred members hadn’t built up,” recalls Punter. “It was also rather technical stuff with the 1975 Pensions Act, contracting out, guaranteed minimum pensions and protection of early leaver benefits. The issues were the unfairness of the system for those who moved jobs, and no real restriction on funding.”
The Maxwell scandal and the Pensions Act of 1995 changed all that, of course, with the introduction of the minimum funding requirement. By the end of the 1990s, with the real rise of DC pensions, Punter Southall acquired a small independent financial adviser – now Punter Southall Financial Services. “That really was the time when people started thinking about closing DB to future accrual. I think we saw it coming, but I wouldn’t say we knew when it was coming.”
That acquisition was the firm’s first of a series, all of which have been around pensions. The portfolio consists of seven other business, including the P-Solve fiduciary management unit and the Psigma wealth management unit, as well as transaction services, data analytics, healthcare and protection and independent trustee businesses. The Psigma Asset Management unit trust business was recently sold.
P-Solve was established in the summer of 2001 as an investment consultant with eight full-time staff to offer manager of manager strategies. “We had quite a few ideas on investments, only to hand them over to the likes of Philips & Drew,” recalls Punter. “We were looking at fee dollars, only not taking as much, and we decided one of things we could do was build managers of managers business.”
Getting more out of the firm’s investment advice ideas meant having a platform to implement the ideas. That meant spending money, and the first recruits were from investment banks. The rise of fiduciary management and implemented consulting means P-Solve was somewhat ahead of its time. P-Solve reckons it is the biggest fiduciary manager in the UK by client numbers, with 66 clients, or 38% of the Total. Its share is 23% in AUM terms.
P-Solve is probably the most operationally different of the businesses and has its own board, as do Psigma and Punter Southall, which has its own small investment consulting practice, for more “plain vanilla” consulting.
So are the duo actuaries who run businesses? “I don’t do much management, I do more client work as that’s what’s always interested me,” claims Southall, who serves as chairman of the Punter Southall consulting actuaries business and who still has about 12 scheme-actuary appointments. Punter, who is CEO of the group, describes his role as “strategic thinking” and says he still spends 50-60% of his time on some form of consulting. He is scheme actuary for six schemes. “I often sit in between the actuarial and investment space trying to make things fit and do quite a lot of expert evidence work.”
What will drive any further acquisition or business expansion? “You can have as many strategies as you want, but it’s quite difficult to execute them all. We are quite cautious in that we do not want to raise our risk profile with a big acquisition,” says Punter.
But both share the idea that consolidation in the actuarial market is not far away.
And DB schemes may be closed to new business and in run-off, but that process will continue for decades, they point out, and despite the long-term ambition of many sponsors to insure their schemes, there is limited capacity in the buyout market. “Different businesses are at different parts of their growth cycle,” says Southall. “The actuarial world has certainly stabilised, if not declined, so you are trying to fight for share in a probably shrinking market. But I think the wealth management business and P-Solve both have legs to grow quite rapidly.”
Do they think the actuarial profession could have done anything better over the years? “Where we possibly took our eye off the ball was more around longevity,” believes Southall. “In a world of higher interest rates, the fact people are living one or two years longer did not have much of an impact on the liabilities, but once lower interest rates and inflation came through it put a real spotlight on longevity.”
And what about the cost of pensions? Southall thinks the actuarial profession has done well at communicating the real cost of a good pension, “it’s just that people don’t want to pay it”
Punter concludes: “No good deed goes unpunished and that is what’s happened with people who set up DB pension plans – they are the ones who are being punished. The desire for certainty is so strong and is encouraged but you can never get to 100% certainty. When we first started, one of the great controlling mechanisms was the level of pension increases. If you make pensions increases discretionary you have great power over the funding level. Successive governments destroyed that and, arguably, the actuarial profession did not stand up to it.”