The European market for pension fund consultants is effectively two markets - a mature and an immature market. In UK the Netherlands and Ireland, where their role is well understood, consultants are firmly entrenched. Elsewhere in continental Europe, however, consultants are far less established.
This has created opportunities for continental European asset managers, investment banks and insurance companies to set up their own consultancies as ‘portals’ for pension fund business.
The most recent and obvious example has been in Germany, where banks, asset managers, and insurers are setting up consultancies to advise businesses on Pensionsfonds, the new vehicle for occupational pension funds that comes into being in January
HypoVereinsbank and Deutsche Bank have created their own vehicles for the new institutional pensions business. These offer a package of consulting, asset management and administration services to companies
However, the most ambitious move into the consultancy arena has been made by Allianz, which absorbed Dresdner Bank earlier in the year. The merged entity has set up a consultancy company Allianz Dresdner Pension Consult GmbH (ADPC) to broker the provision of Pensionsfonds. ADPC is currently targeting some 2,000 medium-sized to large companies and pension funds.
The new consultancy is headed by Horst Ludwig, the former managing director of Pension and Compensation Consulting GmbH (PCC), and the Frankfurt-based consulting subsidiary of Dresdner Bank
Ludwig says ADPC has been overwhelmed by inquiries about the new pension fund from employees. A survey commissioned by Allianz found that 60% of company employees would prefer a pension to a pay rise. However, businesses - particularly smaller businesses - are less enthusiastic. They are worried, in particular, about the complexity of new pension regulations.
Unravelling this complexity is a task for the new consultancies, Ludwig says. “The new regulations will be understood only with difficulty. One of our major tasks is it therefore is to make the complex subject as comprehensible as possible in consulting discussions.”
The leading US investment banks have provided this kind of hand-holding for some time. Morgan Stanley Dean Witter Asset Management will advise pension funds how to determine and define institutional risk, establish their level of risk tolerance and their return objectives and recommend which tools to use to manage asset liability risk.
Epco van der Lende, executive director of Morgan Stanley Investment Management, says an asset liability management (ALM) study is the starting point for running global balanced mandates for institutional clients.
“We consider balanced portfolio management as a two-stage process. First, there is the strategy which is based on the client’s liability structure, return ambition level and risk tolerances. This is an anchor point for the running of the actual balanced mandate. Constructing a customised investment strategy means looking at the specific clients’ situation, gauging what the relevant risk measure is, quantifying it and coming up with a strategic risk / return profile that is optimal to that client going forward.
“Then there are tactics, the day to day running of the fund. The two sources of alpha, tactical asset allocation and stockpicking, are the tactical tools.
“You must not lose the strategic risk profile in the day-to day management. A subconsciously drifting strategy is the most dangerous thing you can have. However, that doesn’t mean that the market is rigid and that nothing changes. There are short-term dynamics you can take advantage of.”
Similarly, he says, assumptions on long-term economic equilibria are key to the outcomes of an ALM analysis . “Our approach is to determine three or four alternative economic climates in terms of a consistent set of economic parameters. We choose one of these climates to be the one we think will prevail and conduct the entire stochastic ALM analysis in the context of this climate. The alternative economic climates are then used to stress test the risks of our optimised results. This is of vital importance since robustness of the strategy with respect to potential future economic directions is key.”
Ideally, Morgan Stanley would like to be involved in determining both the strategy and tactics of a pension fund’s investments, van der Lende says. “If we do the ALM we know all assumptions underlying the strategy and the funds’ sensitivities. From a quality perspective it is preferable that day to day management is aware of this, since it may impact their decisions. In practice, we can also use a risk budget defined in terms of relative Value at Risk (VaR) or tracking error to ensure consistency of our return profile with any strategy.”
He dismisses the suggestion that Morgan Stanley Investment Management’s ALM consultancy services are used to introduce business to its asset management arm. “It is not the proposition we will offer the service and then we look to find the mandate on the back of that. Clients are all different and want different levels of advice. The situation in countries is different also, and the level of demand for consultancy services will depend on the density of consultant provision in a particular country.”
Nor does Morgan Stanley want to trespass on consultants’ territory, he says. “We always try to gauge whether we would potentially enter a consultant’s territory, because we don’t want to do that. Clearly it’s not our core business. For us ALM is not a separate product and we do not want to market it as a separate product. But we do promote the activity as such and we do claim we are good at this. At the end of the day, ALM should serve as a meeting point with consultants, not a battleground, the ultimate goal being to deliver the best possible service to our clients.”
Goldman Sachs Asset Management (GSAM), the asset management arm of US investment bank Goldman Sachs, takes a different, almost minimalist approach to the provision of multi-management services in continental Europe. Ruud Hendriks. GSAM’s managing director responsible for institutional sales and marketing, continental Europe, explains: “GSAM is an asset manager and not a consultant. We position ourselves as asset managers and we leave consultancy to the pension fund consultants,” he says. “In our view, consultants do play an very important role. However, we are often asked for our views on asset allocation or risk budgeting. These are the sort of areas where we think we can add value.”
Hendriks says the ability to add value is the test when competing for fiduciary business. “We only focus on areas where we know we can add value and where we can charge a fee. If you are not able to add value over a certain period of time, then you have problem.
He says GSAM is happy to leave ALMs and actuarialcounting services to the experts. In the Netherlands, for example, GSAM works with the Gouda-based consultants Ortec, one of Europe’s largest independent consulting and software developers.
However, GSAM has also developed some expertise of its own, says Hendriks. For some time now, GSAM has offered this capability to very large institutions in the US. More recently, it began to offer a multi-management service to pension funds and institutional investors in continental Europe. It has already won a substantial mandate from a European client, he says.
“This is a service where we offer a multi-management capability. We say to pension funds ‘We will act as your fiduciary manager. We will advise on asset mix and risk budgeting. When you have chosen your benchmark we will find the asset managers who will outperform that benchmark.”
This could include GSAM managers, Hendriks says. “Whether to use GSAM managers is up to our client. We can accommodate either a model which relies 100% on outsourcing or a model which uses GSAM managers for a portion of the mandate.”
Hendriks emphasises that GSAM has no desire to be all things to all men. “We do not want to do everything for pension funds - just what we do best.”
When the dust settles in the scramble by financial and consulting institutions to set up pension pension investment advisory consultancy services across Europe, many may decide that this is the most profitable way forward.