Consultants thrive in new climate
A country where pensions institutions hardly used consultants at all is now coming around to the idea. Consultants in France see their local pensions market developing steadily, helped by the new investment tools created by legislators three years ago. And they say that pension funds are increasingly likely to turn to external advisers for RFPs.
The implications of the new pensions landscape formed by the 2003 pension reform law is still keeping consultants busy, says Simon Desrochers, managing consultant at Watson Wyatt in Paris. “We are mostly involved in looking at different alternatives for retirement plans,” he says.
The reform created extra tools for those pension-providing organisations to use, and consultants are busy scrutinising the main three alternatives on behalf of clients. The three different options that now exist are the PERCO, a formal defined contribution plan and a formal defined benefit plan.
“They all have different characteristics, so there’s a lot of thinking about what we should be doing there,” says Desrochers.
Companies are constantly making efforts to reduce their costs. “So we look at ways to look at the different reward programmes as a full set,” he says. The consultants then do some arbitrage between these reward programmes to get the best result, he says.
French pension schemes and their sponsors are now starting to feel the ageing of the population and its impact. “A lot of the companies don’t have the tools to keep all their employees,” says Desrochers. “We’re looking at ways of motivating and retaining these older employees.”
Pensions clients are coming to consultants for many different services, and there is no overall trend towards one type, consultants say. Requirements differ from one client to another, says Michel Piermay of Paris-based consultancy Fixage.
One area of investment that is continuing to generate business for investment consultants in France is the ‘Epargne Salariale’ regime that was introduced in 2001. The aim of the scheme is to encourage employees to save through their employers. “Epargne Salariale is still developing as a good field for consultancy,” says Piermay.
Pensions clients are looking for the full range of services at the moment, says David Vafai of consultancy bfinance, including, risk management, benefit design and manager selection. “Whereas clients have traditionally used consultants for aspects other than manager selection, the use of consultants for manager selection will become more commonplace,” he predicts.
In a survey, bfinance found that French institutional investors are now more likely than before to choose fund managers through a request for proposal conducted by an external consultant.
The volume of the market for tenders contracted in 2005 to €14.6bn from €22.7bn the year before, but the year-earlier figure was swollen by the large calls for tender from the Fonds de Réserve des Retraites (FRR). When that element is taken out, it becomes clear that non-FRR pensions market for tenders has doubled year-to-year, bfinance says.
The share of RFPs that were conducted by a consultant is up 5% year-on-year, to 75% in 2005, according to the survey. “The French market, both in terms of assets under management and in terms of openness to consultants is a small market but growing,” says Vafai.
Piermay says one particular issue in the pensions consultancy environment at the moment is the need for investment consultants to register an association which is a accredited by the autorité des marchés financiers (AMF), the French supervisory authority for financial markets.
The shape and international composition of the consultancy market in France has changed since the start of the new millennium, says Vafai. While in 2000, there were only two consultants active in the market, neither of them Anglo-Saxon players, there are now five or six players, including Anglo-Saxons.
Among advisers, there is a segmentation between those firms offering pure consultancy, which is paid for by the fund in straightforward fees, and those organisations that provide financial brokerage or multi-management, which is paid for as a percentage of operations or assets under management, says Piermay.
It is easier now, says Desrochers, to differentiate between the main international pensions consultancy firms in France. The focus seems to be shifting. Hewitt is more involved in outsourcing now, he says, whereas Watson Wyatt has clearly chosen the consulting side. Mercer, meanwhile, is more obviously characterised as being part of a global investment service, with brokerage and consultancy, he says.
The international firms have the advantage over local firms in France, he says. “There are a lot of large companies with international problems,” he says. “There are HR issues; they have to deal with international governance and the mobility of staff.”
Benoît Boru of Hewitt Investment Consulting says the French investment consultant market is quite diversified. “There are very few global consultants and quite a lot of local consultants and individual consultants providing investment advice using a more quantitative approach,” he says.
The most active consultants on the French market are Mercer, according to the bfinance survey, with 34% of the volume, Fixage with 27% and bfinance with 21%. It points out that the ranking is different when analysed in terms of number of calls for tenders, putting bfinance in the lead with 20 RFPs and therefore 27% of the market.
Thierry Brevet, head of Mercer Investment Consulting in France, says its ranking in the survey as market leader showed continued confidence in the firm from French institutional investors. “Since arriving on the French market in 2002, Mercer has demonstrated its ability to advise complex funds such as Ecureuil Protection Sociale launched at the end of 2005,” he says. The appointment by Ecureuil Protection Sociale involved one of the largest RFPs by volume, covering €1.2bn in assets.
Last year, Mercer advised the Agirc-Arcco Federations, the most active French institutional investor on the market, for six of the nine RFPs issued, the firms said,
In France, clients tend to go to consultants for more than a piece of one-off advice, says Vafai. It is a relationship-driven market, with funds tending to develop relations with one or more consultants to serve them over the long term.
Apart from the creation of the PERCO, the advent of the Fonds de Reserve des Retraites has been the main change to the pensions industry in France in recent years. It is now the largest institutional investor in France and has revolutionised and modernised the way institutional investors are organised and are governed, says Vafai.
Recent changes in the pensions industry include regulatory changes which change how pensions and insurance organisations can invest, for example, controlling their use of derivative products, he says. “Another evolution in the market has been a growing interest in alternative investments such as hedge funds and private equity,” he adds.