France: consultants dream of pension fund industry
Manager selection and the right choice of fund have become the main business area for consultants working with pension funds in France. Richard Deville of Watson Wyatt in Paris says this is because the French pensions industry is moving closer to the US model, where defined contribution and savings plans replace defined benefit schemes.
“This is where consultants are needed, for manager selection and modelling funds,” he says. This comprises advising companies across the board and on all types of fund. “It doesn’t matter what you’re looking for, big or small, or whether it’s short term or aggressive liquidity funds.”
Dominique Piernay of Fixage in Paris believes that the growing use of manager selection by pension funds is a result of companies wanting tighter supervision and control of their assets. “These are areas that used to be carried out by managers themselves, but more and more pension funds are getting in a third person who is not connected to their organisation.” She says consultants are also being used to evaluate fund performance, a process known as ‘attribution performance’. “It’s not just the managers we’re looking at but also the assets themselves.”
Dominique Dorlipo, director of consulting at Frank Russell in Paris, says enormous resources have been spent on establishing “qualitative” criteria for manager selection. “We look at the quality of the people; their performance history; their level of experience, motivation and expertise; their preferred investment methods and the consistency of the results in their portfolios.”
Asset liability modelling (ALM) is becoming more widespread in France. “This is not a new thing in France but its use is now more extensive,” says Piernay. Formerly companies looked at assets and liabilities separately but now want to evaluate their relationship. “They are doing this both internally and externally with consultants’ help.” She believes that this shift is a result of new regulation obliging insurance companies and pension funds to publish solvability reports.
Deville suggests that this is an emerging market that has opened up because technological progress has made ALM studies more affordable. “Whilst ALM was viewed favourably as far back as 10 years ago, people didn’t understand why it was so costly. Now new high-tech computers and software mean that consultants can offer ALM studies at a tenth of their former price.”
There has been no real growth in numbers of actual consultants in France, but existing firms have expanded. Deville says the pension fund industry is dominated by big international players, particularly on the asset consultation front. The number of local bureaus is still relatively small. “What we see is a two-tier industry developing. There are the big players such as William Mercer, Watson Wyatt and Frank Russell and then there are the smaller local firms. Only the big companies get involved in the investment side.”
Though the consultancy market remains comparatively small, growth is expected as companies continue to outsource management possibilities. “The bulk of invested assets are handled by people working in the administration of company savings plans and not by money managers,” says Deville. Consultants, previously unable to tap into this area because they were considered unable to provide cost-effective advice, will see this section of the industry expand, since new schemes will require help with both administration and manager selection.
“Pension funds are still not very popular,” Piernay says. But she remains optimistic that this can change in the future. “We can dream. With new legislation designed to stimulate growth in the pension fund industry, the consultancy market will thrive.”