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Consultants' perpetual motion

At the end of a year which saw client demand switch to specialist investment advice from manager selection, pensions consultants waited to see how the government’s new proposals on pensions would affect clients. The National Pensions Board has just published its review report from the minister for social and family affairs Seamus Brennan.
The report was commissioned amid concerns that nearly half of workers in Ireland will be left depending on state pension provision alone, because they have no private arrangements for retirement income.
Kieran Barry, managing director at Hewitt Associates in Dublin, says the outcome of the report is one of the issues facing consultants at the moment.
Levels of funding, too, continue to be a major concern. The funding standard within the Pensions Act has meant that many defined benefit schemes in Ireland are underfunded, says Paul O’Brian, senior consultant at Watson Wyatt in Dublin. Consultants have been busy helping schemes cope with this situation by coming up with rectification plans, he says.
But looking further ahead, advisers have also been assisting pension schemes as they consider root and branch changes, taking a thorough look at what type of arrangement they need going forward, he says.
Joe Byrne, deputy managing director at Coyle Hamilton Willis, says schemes that are underfunded are obliged to put a proposal to the pensions board on how they will manage their deficit over three years or 10 years. “There is a lot of consulting work over that,” says Byrne.
As well as this, there is substantial investment work for firms; funds are looking at liability modeling, and there are more international managers now coming into Ireland.
There is also a lot of activity following the transparency rules of the EU directive on occupational pensions – Institutions for Occupational Retirement Provision (IORP) -- as pension funds take advice on publishing a statement of investment principles, which becomes mandatory.
“Defined contribution (DC) schemes, which have now been going for 20 years or so, are building up; there’s a need for investment advice,” says Byrne. “Overall, the consultancy market is very strong.”
DC schemes are concerned that the current low rates of interest are inadequate for their needs. In many schemes, employee contribution levels are at 5%, with the same percentage going into the pot from employers. “Ultimately, that’s not going to be providing income replacement in retirement,” says O’Brian.
There is a need for many pension providers to conduct a benefit review, going to their participants and saying that contribution levels are not enough. And more of this has been going on in Ireland, he says.
In Ireland, consultants are occupied largely with the issue of coverage, in a market that is less mature than the UK in terms of changing from defined benefit to DC, says Barry.
DC planning is also in high demand. “What companies like ours are concerned with is creating DC plans which are more imaginative and attractive for employers and employees,” says Barry.
And with the publication of the latest mortality tables, there are issues around coverage and funding adequacy to be addressed. The current levels of contributions are clearly not going to be enough now, he says. The Irish government is wrestling with problems that are not unlike those in the UK, and changes in the retirement age are under consideration.
So far the PRSA (personal retirement savings account) low-cost pensions model, akin to stakeholder pensions in the UK, has not been a success inasmuch as it has not caught on with employers, say consultants. Mostly, people have been switching to PRSAs out of personal pension plans, says Barry.
The team at the National Pensions Board conducting the pensions review was reportedly divided on whether workers should be forced to take out mandatory pensions. One observer said it was unlikely that the PRSA would become mandatory, but if it did, this would have a big impact on pensions administrators. All consultants would suffer under such a scenario, he said, particularly those that are heavily into DC.
Any element of compulsion in retirement savings would be very unpopular. “A lot of people are fearful of compulsion which would be deemed another tax,” says Barry.
But the figures do make the picture look worse than it is. While only around half of the working population is covered by pension plans at the moment, this does not take account of the booming economy and the effect it has had, says Barry.
“It is not as if 100% needs to have pension plans,” he says. “A significant proportion has created wealth such that pension plans are not necessary.”
One effect of the growing economic wealth of individuals in Ireland has been seen in the property market. “There’s been an insatiable appetite for property-type investments,” says O’Brian. That has fed through into pensions, he says, with Scottish Provident having sold its property portfolio. Major banks have been syndicating some of their pension property investments on to private individuals, he says.
Within investment consultancy, the focus shifted last year towards the nitty gritty of strategies used. O’Brian says that there has not been as much manager selection work for consultant in the last 12 months as they did see in the previous 12-month period. This is mainly because the financial markets have performed so well in the period, that returns have not been under such close scrutiny. “It has come off the aggressive review list,” he says.
“Probably what’s replaced that is clients looking more at the asset liability mix,” and asking how comfortable they are with it, he says. So the spotlight has turned to risk assessment and asset strategy work, he says.
Byrne says that in recent times, a lot more business has been going out to tender, particularly with the demand for corporate governance work. There are more split mandates, he says, with the administrative side and actuarial side often going out to different firms.
In this way, the Irish pensions consultancy market is moving towards the UK model, he says. The bigger funds can support this, he says, but not necessarily the smaller ones. At the lower end of the market, clients are more price sensitive, he says.
In Ireland, Mercer has the lion’s share of the pensions consultancy market, with Coyle Hamilton Willis, Watson Wyatt and Hewitt Associates competing on smaller market shares.
At the end of 2004, the pensions and actuarial business of KPMG moved to Watson Wyatt, which has been a good bolt-on for the firm’s business, says O’Brian.
Hewitt Associates is said to be aggressively building up its business, particularly in defined contribution.
Most of the work that has been coming out to tender has been on the investment strategy side, says O’Brian. On the other side there has been work in relation to the shutdown of some indigenous Irish enterprises. “So there is a legacy of wind-down work,” he says.

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