GLOBAL – Europe should tackle the “corruption” of relationships between pension consultants and asset managers, says a US lawyer who’s suing a consultant over the ‘pay-to-play’ system.
San Diego city attorney Michael Aguirre likened the matter to the Microsoft antitrust case, where the European Commission investigated the software giant’s market practices.
Aguirre says pay-to-play – an informal system where managers are understood to pay to be on consultants’ lists -is a global phenomenon riddled with “decay”.
“It has created a network which appears to be international in nature. This is because markets are so interconnected and interrelated, including the UK and Europe. We need to bust it all up,” Aguirre told IPE.
“Europe can pick up problems which the US has failed to do effectively. You can police these activities and tackle them in the same way you did Microsoft.” The Commission’s internal markets directorate declined to comment.
The controversial Aguirre is involved in clearing up a pension scandal involving the San Diego City Employees’ Retirement System. He has initiated several suits, alleging mismanagement or worse by trustees and consultants, which has left the scheme up to $2bn in deficit.
The superior court judge in the trustees’ case has already talked of the “foreshadowing of a great case,” according to one report.
Last month Aguirre instituted a case for damages against Callan Associates and the scheme actuary. He has accused the group - which advised the city pension scheme for 23 years – of having undisclosed conflicts from a pay-to-play scheme and ignoring investment guidelines.
Callan did not respond to repeated calls and emails seeking comment.
“Pay-to-play is a network that I can compare to the Internet,” Aguirre said in a phone interview. “Relationships develop; everyone understands the way the market works. I describe it as decay.
“It’s riddled with corruption. It’s all part of one gigantic operation that is skewing the market. It isn’t limited to just paying to get in, but creates a network which develops and grows.”
Edward Siedle – a former lawyer at the US Securities and Exchange Commission, and president of Benchmark Financial Services, which investigates pension fraud - believes that ‘pay to play’ is common in Europe.
“This is because companies hired to provide independent or unbiased financial advice to pensions can earn far more money providing advice tainted by undisclosed financial arrangements,” he said.
“Pension funds will never pay consultants for objective advice as much money as managers will pay consultants to bring them accounts.”
European-based asset managers denied the problem exists in the way Aguirre and Siedle describe.
William Babtie, director of the UK’s Fiduciary Trust International believes it was more of a phenomenon in years gone by.
“Ten years ago the UK pensions industry was quite entrenched where monies were concentrated with a few managers. But now there is a greater move towards more specialist managers, and boutiques are also able to get a foothold,” he told IPE.
Investec Asset Management’s head of UK institutional business Mark Samuelson also disagrees with the US critics’ descriptions.
“It’s not pay-to-play but it’s all about relationship building,” he said. “It’s important for consultants to add value for their clients. They therefore need to spend time getting to know managers for the sake of their clients.”
This also benefits managers, who face an extremely rigorous, “reasonably transparent” process to get short-listed for beauty parades.
Neither Babtie nor Samuelson denied the power and influence consultants still have “especially regarding strategy and manager selection”.
“It is difficult to get face time with consultants, especially if they are happy with their list. The list is also very small - consisting of between five and 10 managers - and there are so many managers out there,” said Samuelson.
He believes, however, that managers have more access to clients than in the past - based on a new “value-added” triangular system. This supposedly allows managers to access clients but also keep consultants in the loop out of courtesy and vice versa.
However, pensions investigator Siedle contends: “The largest consulting firms operating in the US also have European operations that follow the same business practices. For example, a US money manager will pay these consultants for pension accounts, regardless of the geographic location of the pension.”