Benefiting from market changes
Companies in both Germany and Austria are putting their energy into cutting the risks posed by their pension schemes. Consultants have been called in, and helping schemes make the switch to DC is now at top of their agenda.
But business conditions are tough in Germany at the moment, says Alfred Gohdes, CEO of Buck Heissman consultants in Wiesbaden. “There is intense pressure on fees and the value propositions have to be more competitive in a faster and more complex environment,” he says.
Much of pensions consultancy in the country still consists of supporting clients who are transforming the basis of their benefits, says Georg Thurnes, board member at consultancy BodeHewitt. “There is still a lot of restructuring of pension schemes from defined benefit (DB) to defined contribution (DC),” he says.
In Austria, whether a consultancy is in demand or not depends on the type of activity it specialises in, says Roger Emmett, manager employee benefits at Austrian consultancy IVM Kiefhaber.
“If you do a lot of benefit design the business is steadily increasing because most of the companies have old DB plans and want to switch to DC plans and cut down costs,” he says. However, those consultancies concentrating on actuarial work are probably finding their level of business activity falling off, he says.
Also with risk minimisation in mind, says Thurnes, pensions clients in Germany are using consultants to help them with CTAs (contractual trust arrangements). “Many companies are going down this route,” he says. CTA involves earmarking assets which can be used to offset pensions liabilities held as book reserves.
The focus for pension funds and schemes is still firmly on their obligations rather than tweaking the investment mix. “Manager selection is not that high in demand,” says Thurnes, adding that: “…anything related to liabilities is.”
Regulatory and legal changes continue to affect the Austrian pension industry. “Especially in the last year,” says Emmett. “And it seems that we will be confronted with further changes next year.”
Implementation of the EU pension fund guidelines was the most important change, says Kurt Bednar, managing director at Mercer Human Resource Consulting in Vienna.
In September, a new product will come onto the market in Austria which presents opportunities for pension clients, says Waltraud Viehboeck, senior consultant at Aon Jauch & Huebener in Vienna. The product - Betriebliche Kollective Versicherung - will, in the mid to long-term provide an interesting alternative to the existing pensions possibilities - pensionskassen, direct pensions and direct life insurance.
“I can’t say how successful it will be, and certainly so far the response has been quite moderate… but probably because it is an insurance product,” she says.
Advice on benefit design and risk management is still being sought by Austrian clients, says Emmett. Bednar points out that risk management - in the form of asset liability management - will be mandatory for all pension funds starting from September 2006.
Mercer includes risk management, benefit design and manager selection as part of the support it provides for investment boards, she says.
Emmett says clients are often interested in getting one-off advice on a particular issue, but then come back to the consultancy if they encounter any problems. But they often do have a preferred consultancy. “With most of our clients we have a broader relationship,” says Emmett. Mercer too, finds that clients prefer to have a broader relationship with their consultant which takes the form of ongoing assistant to pensions investment boards, says Bednar’s colleague at Mercer Michaela Plank.
“The market in Austria is really quite limited, with very few consultants,” says Viehboeck. The main players are Aon, Mercer, Willis and Greco International, she says. Between them, these four have around 90% of the pensions consultancy market in Austria, she says.
“In Austria, the market for investment consulting - which is a very important business area in other countries - hardly plays a role at all,” she says. This is because pensions investment is so heavily regulated. “There is very little room for manoeuvre in how one invests… everything is strictly laid down.”
In any case, the Pensionskassen tend to be owned by the insurance companies or the banks, and the parent organisation takes care of the investment side of things in-house.
Not all of the international consultancies are represented in Austria, says Emmett, pointing out that major players Towers Perrin and Watson Wyatt have no presence in the country. And some of the consultancies are partly owned by insurance companies, he says.
“A lot of the consultants in Austria do not belong to any network and only work in Austria,” he says. In Germany, increasingly, local consultancies which aim to offer a broader range of services to pensions clients are finding advantages in joining forces with an international consultancy. German auditing firm Rauser merged with Towers Perrin in Germany in 2001 to form Rauser Towers Perrin.
Reiner Wurzberger, board member at Rauser Towers Perrin notes that US and UK companies have sought to have international control over their foreign pensions operations for the last 20 or 30 years, but for German companies this is a newer phenomenon.
“It is only in the last two or three years that they have been drawing up policies that are valid internationally,” he says. “That has led to the companies seeking out those consultants who have international capabilities.”
So on the one hand, German consultancies have been looking for links with international consultancies, and on the other, international consultancies have been seeking ways into the Germany market. “This has led to stronger concentration in the German market, and this has been a marked feature,” says Wurzberger.
Alpha Portfolio Advisers, a consulting boutique specialising in asset allocation and manager selection for pension funds, insurance companies, corporates and endowments, sees an increasing appetite among clients for hedge fund exposure.
The consultancy has been advising Bayerische Versorgungskammer (BVK), Germany’s largest pension fund with €38bn in assets, in its planned move to increase its allocation to hedge funds. BVK aims to raise hedge fund allocation to €1bn by the end of 2006, up from €150m currently.
Alpha has been retained by BVK to advise on its future hedge fund investing.
“Hedge funds are still a minor topic here compared to the UK or the US,” says Christian Schlenger, managing partner at Alpha, “but they might become more so in the next few years.” The sight of major players, such as the BVK, moving into alternative asset classes may encourage make other pensions institutions to take similar investment steps, he says.
“There might be more interest in them in the future; hedge funds especially, but also private equity and Real Estate Investment Trusts (REITs),” says Schlenger.
REITs will be available for investors in Germany next year, and Schlenger predicts that there will be interest in the new vehicles which offer a combination of property and equity. They also have the advantage of being highly liquid compared to other types of property investment.
“The typical open-ended real estate funds have had huge problems, and huge outflows from their funds,” he says. “Many institutional investors may be looking for alternatives in this area.”
Schlenger says Alpha is a typical local player which is very much focused on
Germany. “We want to be a leading in quality consulting in Germany,” he says.
Wurzberger says shifting pension schemes from DB to DC is one of Rauser Towers Perrin’s specialities. “Not only do we set up new schemes for new employees, but we are transforming older schemes into the new ones, so that all employees are included in the new,” he says.
The big challenge in the German pensions industry now, says Wurzberger, is trying to create a very flexible form of pension provision. With the ageing population and falling birth rate, there is often a lack of expertise within corporations. For this reason, it will become necessary for some employees to retire earlier while other ‘experts’ may be needed until they are 70, he says.