Still in shadow of the slump
Even though financial markets have turned around since their three-year decline, pension funds in Portugal are still suffering the effects of the slump. Consultants see continuing demand from their clients for advice on how to deal with the deficits they are faced with and put risk controls in place to guard against repeats.
The main issues facing consultants in Portugal right now, says Rui Guerra, senior consultant at Mercer in Lisbon, are the weak signs of economic and financial revival, and the neeºd to provide risk management and governance advice to clients.
Bernie Thomas of Watson Wyatt in Lisbon agrees that the continuing weak economy will be a major focus in the work of consultants this year. Last year saw a significant recovery in investment returns for pension funds, but clients still have to deal with the deficits in the wake of poor investment performance over previous years.
Apart from this, there are legislative changes in the pipeline. The industry, says Santiago Gil de Biedma, Jr of Aon Gil y Carvajal in Lisbon, is still awaiting details of legal regulations concerning the new social security law. Once this legislation is out, consultants will have to advise on the implications of the new rules. Until then, this uncertainty surrounding the future changes to the social security scheme will continue to be an issue.
The big international accounting standards changeover is also high on the agenda, with many clients in the middle of the IAS rule implementation, in particular IAS 19, for multinational company clients.
Thomas foresees more time spent in working with companies as they continue to focus on their need to reduce costs. There will be a lower level of demand for project-oriented work.
In Portugal the pensions consultancy market is dominated by international firms, with Watson Wyatt and Mercer at the top. Hewitt takes third position, with Towers Perrin and Aon providing modest consulting support outside the country.
Gil de Biedma says local firms that exist in the Portuguese pensions consultancy market tend to be too small to complete with the international, or internationally-affiliated firms.
“Given that pension issues are global and considering the resources,
international firms have an advantage,” says Guerra. “However, local consultancy firms may have a role to play with smaller companies.”
Thomas says the local consulting firms do provide consulting support to a few companies. And there is a wider form of competition in the market, with some of the same services being provided in the Portuguese market by fund managers and insurance companies. These institutions also provide actuarial services, plan design, investment consulting support and communication services.
Gil de Biedma says it is particularly in the areas of investment management and benchmarking that consultants are up against some banks and asset managers. Thomas says there is no particular resistance on the part of clients to paying for independent consultancy fees. “As in all markets, clients want to receive value for money and are keen to ensure that the fees that are paid are justified by an appropriate level of service,” he says.
Some of the same services which are offered by pension fund consultants are also generated inhouse by the pension funds themselves. But consultants do not see this as a threat to their business, because there is an increasing recognition of the value of independent advice.
“Pension fund managers are providing some of the services consultants provide,” says Guerra. “However, the independence of consultants is seen as an important issue by clients. As governance issues are becoming more visible, the independent advice of the consultancy is valued by clients.”
As long as the client sees the advantages that a good consultant can offer, Guerra says there is no resistance to paying fees for services. Guerra says there are some specific issues that require one-off advice. Mercer’s experience is that most clients are looking for a broader relationship with a consultancy, he says. At the moment, companies tend to be seeking advice on benefit design and re-design, governance issues, investment monitoring and benefits accounting.
Most often, consultants are used to help with the international bidding process for multinational companies looking to establish global management services, says Gil de Biedma. As well as this, clients are looking for advice on benefit design and manager selection, among other services.