If pension consultancy is a growth area, just what is it that these firms bring to the party, and what persuades fund managers that outside advice is both desirable and cost efficient?
Geoff Pearson at Sainsbury’s Pension Fund in London is quite clear on the issue. “We would use consultants any time we felt we were getting added value. No matter how professional a fund manager is, as in any other position, there is always someone who specialises a little more in a particular area.”
As Pearson points out, consultants should be catalysts for constructive change, but they can also help trustees to reach a reasoned decision on what could be a contentious issue. “Sometimes you need the consultants to put across a point to trustees, who may feel happier with an outside point of view. On the other hand they may be presenting a devil’s advocate argument, helping the trustees to see both sides of the coin. To that extent it is often the trustees who ask for a consultant’s report.” In that respect, more and more niche consultants are appearing in the UK. “We often use firms on a one-off basis if they have a particular expertise. For example, we recently appointed a small firm to advise on a particular legal issue, whom I had not even heard of a few weeks before. They were able to show, however, that they could produce something which no-one else could offer, and so we had no hesitation in using them. In that sense we were getting the added value we are always seeking,” says Pearson.
The requirements of the trustees often influences the use of consultants in the UK, where perhaps a wider range of services is available than in continental Europe.
On the use of outside advisers by pension funds, William McDougall at Lucas Varity says, “Partly we would use consultants because in a particular area they are more cost-effective, but there are also diligence and transparency issues. For example, we can obviously measure our own performance, but the trustees are happier if we have an external company to carry out that function.” He also believes that consultants have traditionally been used in the UK and US and there is little doubt that the practice is continuing to expand.
The issue of transparency is also raised by Steve Mingle at Diageo in London. “We depend on external advisers for two reasons. Firstly we simply do not have the expertise to do everything in-house. I should stress, however, that this is advice, and at the end of the day the fund manager is the one making the final decision. However, so far as investment advice is concerned, the trustees have a duty to ensure that the assets are invested properly.
“In this sense the use of outside consultants is a good way of communicating confidence to the members. They can see that the trustees are getting independent advice, and that is at arm’s length from the company.”
This faith in the world of the ‘expert’ does not necessarily transfer to mainland Europe, however. There doubts exist about the efficacy of the consultants, as well as problems which naturally stem from the different investment cultures.
One manager in Brussels, who preferred to remain anonymous, raised the question of fees. “We must always look at value for money, and there are serious doubts about whether we can get that by going to an outside company to do work which we feel we can do equally well in house.”
He adds: “If we do go out of house, and in some cases such as choosing an asset manager we usually do, I would be inclined to use a smaller local consultant, rather than one of the larger firms, or accountancy companies who suggest that they are experts in every area.”
A similar view comes from the different perspective of a civil service fund. Daniel Gloor of the Canton of Zurich says his fund began outsourcing in 1991. “We felt we really did not have the expertise or knowledge to carry out some of the functions efficiently. Also in a political environment it is often best to have a neutral outside view. The final decision of course lies with us.”
He agrees, however, that he would rather use dedicated consultants in particular areas. “I would not be interested in using the larger accountancy firms, as I do not believe they can offer the quality of advice we get from our existing consultants.”
Klaus Kirschenhofer of Wacker Chemie in Germany says his fund has changed its strategy about consultants in recent years. “We used to have a general agreement with a pension consultant some time ago, but we have now decided to work with companies on a project-only basis. One of the reasons was a question of costs, but there were a number of other issues, stemming mainly from the value we felt we were getting from the firm involved.”
Another fund manager in Frankfurt, who chose not to be named, also questions just how much value consultants really brought to the table. “We found consultants very expensive, and in some cases not very original in their advice. One is always looking for value for the fees, which one has to say are very high. We felt that the costs were not justified, and over a number of years we felt that we had just as much expertise and ideas as the outside consultant.”
Nevertheless, Kirschenhofer believes the general trend in Germany is towards the appointment of consultants, particularly in the area of investment advice.
“There a is a great deal of pressure on fund managers to produce good returns, and so as the markets become more complex and volatile, many funds feel that that they need help. In that sense consultants should ideally cover all aspects from portfolio strategy to management selection,” he says.
He points out, however, that there are not many dedicated consultants in Germany, and raises a question-mark over the use of the larger international firms. “One of the problems with looking to London is that companies there are focussed on the Anglo-Saxon investment culture, and sometimes do not realise that other environments can be just as profitable. When it comes to advice, they often overlook the German investment world, and domestic investment managers. Although they could advise a multinational on relative strategy in the UK and the US, the value of their pan-European advice will probably depend on their resources in a particular country.”
The issue is taken up by Rob Prins at Akzo Nobel in Amsterdam. “We are multinational, and so have separate funds in each of the countries in which we are active. In common with most companies we have our actuarial work outsourced, but we are beginning to move towards a similar decision on investment advice.” He believes that there is a need for more expertise as a result of market conditions, especially with regard to equity investment. “We do change our consultants regularly in North America, for example, but we are just beginning to change our plans here in Holland. We are just starting to out-source some areas, and so are at a very early stage of the process.”
This has meant that the real estate portfolio has already gone to an outside manager, and Prins confirms that the company are already looking for managers for other sectors of the fund’s investments. He believes that this is a general trend, and expects consultants to play a greater role in the next few years. This will mean including in the process smaller niche companies alongside the more established practices.