The UK's smaller pension schemes are arguably more varied and challenged than the bigger ones. Martin Steward meets some of the advisers dedicated to helping them cope
David Fothergill, as head of human resources at Somerset-based buildings merchants Bradford & Sons, deals with the day-to-day running of the firm's £25m closed DB pension scheme. Asked why the scheme uses Bluefin Corporate Consulting as its administrator, actuary and investment consultant rather than one of the big household names, he doesn't have to think too hard.
"Their business is much smaller and a lot more personal," he says. "We've known all the people for years - and it's about having trust in people, isn't it?"
Bluefin specialises in the UK's populous sub-£250m market. Similarly, Mattioli Woods is a leading name in individual SIPPs and SSASs, but also maintains an employee benefits practice for modest-sized schemes. As marketing director Murray Smith puts it: "With a smaller consultant, you can go from being a tiny scheme to being a big client."
That is less ‘soft' than it seems. The big boys tend to lavish their bells and whistles on trophy clients while rolling out a house-view ‘strategy for smaller pension schemes' for the minnows. "Like it or not, the larger firms do develop solutions that aim to benefit the majority, but which do not necessarily suit each individual scheme," says Hamish Wilson, founder of Hamish Wilson & Co.
And yet the universe of smaller schemes is necessarily more complex and varied than the multi-billion pound elite - a £25m scheme with 400 members is very different from a £250m scheme with 4,000 members (and much more different than a £1bn scheme is from a £10bn one). The more members a scheme has, the more statistically normal its profile and the variety of sponsors - publicly owned, privately owned, family-owned - is also likely to be more varied.
Not only are these clients labour-intensive and low-revenue, they also present other risks to bigger consultants, as Antony Barker, head of investment advisory at JLT's Pension Capital Strategies (PCS) observes. PCS works with some large pension clients. But its ownership of Profund meant that it administers a large tail of sub-£20m schemes which, to limit costs to a few hundred pounds per year, took advice on an ad hoc basis from the consulting service. But that left it unclear whether or not PCS incurred a liability as these schemes' consultant. "I had to put the brakes on," says Barker. "Unless you can generate at least £10,000 a year you have to be careful not to expose yourself to a huge liability." PCS wrote to each scheme advising them that there was a good argument for investing resources in the firm's low-cost strategic investment structure, but that if they weren't interested they would have to respond stating that PCS was not their consultant.
Sounds a bit harsh - but it is an important message: if you are going to spend money, make sure you spend it on a service that's relevant.
"The sub-£500m market is poorly serviced," says Robin Hames, head of technical, marketing and research at Bluefin. "And that can mean over as well as under-serviced. Are you paying for much more than you actually need?"
Simon Jagger of Jagger & Associates also wonders what benefit smaller schemes get from the "eye-popping" fees charged to maintain City offices stuffed with analysts and blue-sky thinkers. "It's all very well having all these capabilities - does it feed through into any real advantage or value for money in the end?"
Nick Atkin, head of consultancy services at Atkin & Co, agrees. "Standalone investment departments come up with sophisticated solutions for the larger clients, and you pay a premium for that," he observes. "But many of these solutions just aren't practical for the smaller clients, and there may be fixed costs of entry into them that just price them out."
And the practicality issue runs deep. This is not just about the potential anomaly of standard ALM models suggesting local currency emerging debt or forestry for £50m funds - it is about questioning whether, for example, ALM modelling that works well for larger schemes is suitable for smaller ones at all. After all, ALM assumes some stability and predictability around cashflows that may simply not exist with a mature scheme whose benefits are tilted towards a handful of senior executives.
"We spend time looking at liquidity rather than ALM-type modelling," says Mark Hodgson, managing director at Gatemore Capital Management, which specialises as a ‘dedicated CIO' for smaller institutions. "How much money do you need in the next two, three, five, 10 years? How much can you afford to tie up in illiquid assets? And by ‘liquid' we don't just mean being able to get your hands on the cash, we mean volatility as well."
Atkin recalls being asked to conduct an ALM for a scheme and finding, after a few initial calculations, that it was within striking distance of buyout. His response was to drop the ALM - "a waste of money for them" - and instead design a dynamic de-risking strategy aimed at reaching buyout level as soon as possible. "We can only do that kind of thing because we know our clients well, our actuaries sit in the same room as our investment consultants, and we can all design a strategy together," he says.
Indeed, this experience underlines a number of points. Trustees of smaller schemes might not always be fully aware of their options or even their objectives; the schemes themselves tend to be more mature than average, which makes the link between assets and liabilities, actuarial and investment advice, particularly keen. The ability to think quickly about options, objectives and strategy, taking in whole-scheme risk, and to communicate that thinking clearly to trustees, is paramount. Many smaller firms make a virtue of the fact that their actuaries and investment consultants work closely together - or even share expertise in both areas.
"Joined-up advice is important," says Adrian Kite, an investment specialist at First Actuarial. "All of our actuaries are qualified to give investment advice and are comfortable doing so, but lots of schemes use separate teams, and the trustees see them separately."
In fact arrangements often fall into two extremes. Many smaller schemes are happy to use a local actuarial firm but feel more comfortable taking investment advice from a household name. At the other end of the spectrum, a significant number still turn to a local stockbroker, wealth manager or IFA. That leaves schemes with a non-liability-related investment strategy and a box-ticking actuarial service.
"We often find strategies that have clearly come from advisers who are used to working with individuals rather than corporates," says Peter Shellswell, founding director at First Actuarial. This is the gap the firm attempts to fill with its investment advisory practice; and why administration and actuarial firm Premier Pensions Management formed a strategic partnership with Gatemore in November 2010; and why Bluefin has partnered with Redington to bring some more sophisticated LDI thinking to modest-sized schemes.
An inevitable part of that service is ‘end-games' like buyout and transitioning to DC - and, unlike the big names, for many of the smaller players self invested personal pensions (SIPPs), small self administered schemes (SSASs) and group personal pension schemes (GPPSs) have been bread and butter for years.
"For a variety of reasons the more established players took longer to recognise the shift from trust to contract," says Hames. "Where they did move from DB to DC they tended to add a DC element into an existing trust. But the nature of consulting in the GPPS space is very different - it's much more about employee engagement and education, and helping the employer engage with its workforce through its pension arrangements."
Hames points to Bluefin's Orbit online technology platform to make the point. Users can log on whenever they want to check their benefits, and the branding is centred on the employer, not on Bluefin or the funds provider. "And we haven't just stuck their logo on the website - the entire employee site is in their company's livery and language. It's bespoke."
All of the smaller firms IPE spoke to can cite experience of being called in, even by larger schemes serviced by the big consultants, to set up their DC arrangements or fix poorly-conceived trust-based schemes. "I'm sceptical of the reasons for embedding DC schemes into DB," says Shellswell. While there were some advantages when schemes were in surplus or members could buy scheme pensions, today "the vast majority of clients should go down the GPPS route".
The fact that many do not reflects the reality that their big-name consultants bring a ‘DB legacy' to the problem of DC. "We're a bit more fluid in our approach to DC because our business model isn't structured around the DB concept," says Smith at Mattioli Woods. But there is a commercial element to the larger consultants' approach, too. Doing DC well "is not lucrative, and it's messy", Smith observes. "If he bigger players do get involved on the actuarial side of a DB scheme they are happy to simply let the position languish."
It is an important point. The larger players have a vested interest in extending the life of DB - by either favouring trust-based DC or ignoring DC altogether - even though it may run against the interests of hundreds of smaller sponsors.
And this does indeed seem to be a big firm/small firm dichotomy. Two firms IPE spoke to do not work in contract-based DC. Jagger & Associates is a pure investment consultancy whose pensions work is exclusively DB - but Jagger has no reason to want to prolong the life of DB unnaturally: firstly, he anticipates plenty of work in this area for a small firm such as his; and his longer-term strategy is to extend his services deeper into the charities, endowment and foundations community, again a possibility afforded by his not being a volume-driven behemoth. Gatemore does some trust-based DC, but no contract-based, and Hodgson concedes that the eventual disappearance of DB is "a threat to our business". In the meantime, it is an opportunity, as Gatemore's model is based on implementing investment strategies that bring buyout solutions within reach."We're not in the business of extending DB life just because it suits our business model," he says. "In fact we say that we should see a turnover in our clientbase every 5-6 years, because if we've done our job properly our clients should become fully-funded and get bought out."
In a way, that's another aspect of the tiny scheme/big client syndrome. For smaller consultants, the legion of smaller UK pension schemes represents a big pool of business opportunities at decent margins: engage with a client, help them get on top of their pension problem, and move on to the next client. For larger consultants, this is low-margin, potentially high-maintenance work: it's no wonder the temptation is to saddle them with off-the-shelf, holding-pattern ‘solutions' and forget about them as the fees roll in.