Pension funds looking to outsource some or all of their functions have long had a wide choice of consultants and specialists. Recently, established pension funds have looked to take in business from external, third-party clients. Currently this is a modest trend but it seems like one that’s set to grow.
Starting to deal with external clients is hardly a natural move for most pension funds, not least because of constraints imposed by the way they are constituted. It is no surprise to find, therefore, that a change in direction usually stems from a strategic overhaul within the parent company. Furthermore, the changing pensions environment, bringing tighter regulations coupled with the need to deliver better value to fund members and to sponsoring companies, has encouraged funds to be more market-driven and look outside for additional business. This brings the benefits of spreading fixed costs more widely, creating new investment opportunities and generating revenue, to the advantage of the core business.
In the UK, General Motors Asset Management (GMAM) is wholly owned by General Motors. In 1999 when GM decided to spin off two companies in the group, its UK subsidiary successfully bid to retain asset management for those two funds. Subsequently GMAM (UK) tendered for and won the asset management of GM acquisitions and begun to offer its services to companies outside the group. It now manages £1.3bn (€1.9bn) of assets, a quarter of which are on behalf of third parties.
GMAM (UK) is a multi-manager asset management company operating nine unitised investment funds and a property unit trust. “Our business is asset management,” says investment director Andrew McGaw. “Clients can choose the asset mix that suits their liabilities. But we try to be as flexible as possible. For example, our corporate bond fund was set up originally to meet a particular client’s needs.”
In Switzerland, ABB Vorsorge was set up four years ago as a result of restructuring within the giant ABB group, becoming a subsidiary of the firm’s pension fund. As a semi-autonomous organisation it saw the opportunity to serve other funds. Currently it has 29 client funds representing 27,000 members. Total funds under management are CHF5.5bn (€3.9bn), of which just over a third are on behalf of non-ABB clients. ABB focuses on providing a complete service for DC schemes.
In the Netherlands, one of the best-known examples of an established company pension funds turning to the third-party market is asset manager Schootse Poort, born out of the industrial giant Philips. Schootse Poort has a slightly different story, because even before it became a separate corporate entity within the Philips group, with the remit of operating competitively in the wider market place, it was transacting third-party business. Its tally of clients is now 15, including three mandates from Philips, which represent over 90% of its €30bn under management.
But head of marketing Rob Schreur says: “Any further international growth will be for Philips companies, at least for the time being.” Schootse Poort is in the business of full-service provision. “We can do admin only,” says Schreur, “but our strengths are in bundled services including asset management, which is where the main growth in our business is coming from.”
Another Dutch outsource provider is Mn Services. This organisation with €18bn under management, looks after administration and asset management for firms affiliated to the Dutch metalworking sector, as well as for external clients. Martin Sanders, head of strategy and development, says: “We can provide a complete pensions service – a one-stop shop. But that doesn’t mean that Mn Services undertakes everything itself. For example, the majority of our equities are managed externally, such as fund of fund management.”
These funds might operate in different markets and offer different product/service mixes, but they have a lot in common. For example, they tend not to be aggressive in their marketing, preferring slow, controlled growth to rapid expansion.
Schreur at Schootse Poort has a similar view. “We had five new clients in 2001 and two last year. If we don’t take on any new clients in 2003 that’s not necessarily a problem. We are looking for quality, not quantity.”
ABB Vorsorge’s Maria Gumann says that they will happily take any number of new asset management mandates, “but we aim to take on only two or three full-service clients a year. That way we can grow manageably and maintain quality.”
Mn Services takes a somewhat bolder stance: “We’re keen to develop our third-party business,” says Sanders. “Our current focus is the domestic market, but we want to expand to other markets together with strategic partners.”
Gumann says that clients come to ABB Vorsorge partly because of its reputation in asset management but also because it is experienced in handling broader pensions issues. These days, pension trustees need allies they can rely on, and third-party providers regard the nature of their relationship with their client as being of paramount importance and something that they can offer as a core and distinctive strength.
Sue Flynn, chief executive at GMAM (UK) says: “Our service is very personal and tailored to the client’s needs. The important thing is that we understand pension funds and how they operate. We understand trustees and the issues facing them. We think the same way and talk the same language.”
Schreur agrees: “We understand pensions funds’ needs and problems. We understand the broader issues. We pride ourselves on the quality and depth of our advice. It’s an important part of what we offer.”
With the emphasis on value through service, relationships and performance, it is unsurprising that cost is not a big factor in winning over clients. These outsource deals create value through wider benefits. “We have to be competitive on fees,” says Schreur, “but it’s not a big selling point.”
Have pension funds moving to third-party business had to undergo great organisational upheaval? Seemingly not. They might have taken on some extra staff and beefed up their capability in certain areas, but reinvention has never been on the agenda. Nor have they had to implement major cultural change. Sales and marketing teams tend to be small, and focused on relationship management. Thus the new business has represented more or less an acceleration of their original core business, and the transition gradual and painless.
However, pension trustees choose to manage their funds, they have to satisfy the regulatory authorities. How do the regulators feel about business being placed with other funds as opposed to specialist independent outsource providers? Very relaxed, as it turns out. Mary Hutch at the Irish Pensions Board says: “Ultimately the buck stops with the pension fund trustees who are charged with acting in the best interests of their members. The legislation is framed so as to safeguard fund members’ interests.”