In a marketplace crowded with specialist
fund managers, many pension
funds rely heavily on a consultant
to help them search for what
they want and haggle once they have
found it. But choosing a consultant in
the first place, and then later deciding
whether to keep the one they have,
can be almost as complicated.
So, what should pension funds be
looking for in an external adviser?
The primary consideration for a
pension fund when choosing a consultancy
should be independence,
says Andrea Canavesio of consultancy
Mangusta Risk in Rome. Funds
should look to make sure that the
firm is independent of banks, fund
managers, insurance companies and
other parties, both in terms of shareownership
and relationships.
“Do they offer their services to asset
manages as well?” asks Canavesio. “If
so, there could be some conflicts.”
The staff pension scheme of Banca
Nazionale de Lavoro agrees. It
awarded a consulting mandate to
Mangusta Risk last September. Egone
Buricca, the pension fund’s manager
of financial investment, administration
and control, says that the board
decided to use an external adviser in
2003 when the scheme switched from
being largely DB to predominantly
DC. It wanted an adviser to help
with strategic asset allocation and to
supervise the tactical asset allocation,
diversification of asset managers,
monitoring and performance measurement,
he says.
Before this, the board had simply
taken advice from its sole asset
manager, BNL Gestioni SGR. But
the financial portion of the fund’s
assets had grown to a size where it
had become essential to diversify, says
Any adviser the scheme chose had
to be independent in terms not only
of share ownership but also in its
relationships with asset managers.
“If 50% of the revenues of my adviser
come from services offered to three
asset managers, I do not consider the
consultant independent,” Buricca
The organisational and IT structures
of the consultancy are also very
important, and potential pensions
clients should check the firm’s data
inputting systems, the software, database
and the indices it uses, Canavesio
Also important, is the professional
expertise of the consultancy’s management
layers – in the financial markets,
financial research and analyses,
quantitatively and so on, he says.
Once it has appointed a consultant,
the pension fund should make
sure it reviews the situation regularly.
Canavesio suggests the first review
after the appointment of a consultant
should be at least two years on,
then after that the fund would be well
advised to undertake annual reviews.
Canavesio says pension funds are
willing to switch consultant if they
are not happy with the way the job is
being done. “I know of consultants
who have lost many clients in the past
two years,” he says, although he adds
that Mangusta Risk has never lost
Even if a pension fund is perfectly
happy with the service being
given by their current firm, just
the process of putting the mandate
out to tender can often throw light
on interesting new possibilities that
the scheme would not otherwise have
Last September the £1.3bn (€1.9bn)
Plumbing & Mechanical Services
Industry Pension Scheme in the UK
awarded a consulting mandate to
Hewitt Associates. The previous consultant
to the scheme was Mercer.
Robert Burgon, secretary and pensions
manager of the scheme, says the
decision was taken to review the consultancy
appointment because it has
been in place for 10 years.
“We felt it was appropriate and
invited a number of organisations to
come and present,” he says. “We were
looking for a firm with the right kind
of skills to give advice on the right way
for our investments to be managed.”
Pension schemes differ widely, he
points out, and there is no particular
investment model that will fit them
all. “We’re probably more different
than the average, so a good understanding
of the type of scheme and the
problems we have was important,” he
Burgon says that he and others at
the scheme were looking for innovative
solutions – ideas that others may
not have come up with – and above
all, people who they could get along
with. “The change was no real criticism
of the previous consultant,” he
says. “We were generally happy with
the advice we were getting.
“But it just happened that there were
some innovative thing that we hadn’t
previously thought of, that would add
value,” he says.
Before the Plumbing & Mechanical
Services scheme had appointed Mercer
a decade earlier, there was no external
advisory firm helping the scheme.
Back then, the fund was much smaller
than it is today, with assets of around
“We felt we needed professional
input into the way our investments
were managed,” he says. Independent
consultancies have access to far
greater amounts of information than
would be available to the fund on its
own, he notes.
Trustees have to consider the effectiveness
of the advice they are getting,
Watson Wyatt noted in a ‘What
if?’ paper in September 2004. It suggested
a methodical way of assessing
whether the advisers that a pension
scheme is using are doing a satisfactory
The approach is the ‘balanced scorecard’
concept, which was created by
Robert Kaplan and David Norton as a
management tool that probed deeper
than traditional measures of financial
performance. It involves four quadrants
of measurement – the principal
target measure, support measures, risk
measures and process measures. The
key behind the concept, says Watson
Wyatt, is to identify the drivers that
will lead to success, that can then be
measured and managed in the shortterm
to maximise the likelihood of
success in the long-term
Paul Deane-Williams of Watson
Wyatt says that there is an annual
independent research study of consultants’
performance, which the firm
thinks is the best guide for assessment
of abilities. This study looks at four
factors – client satisfaction on quality
of service, technical sophistication,
knowledge of managers and capability
of consultants.
“Clients would be well served by
considering these in their decision
making,” he says. He points out that
Watson Wyatt measures itself with the
same rigour that it measures investment
Although he says pension funds
should review the appointment of
a consultant reasonably regularly,
Deane-Williams says there is a difference
though between formal and
continuous review.
Pension funds should talk to
their consultancy firm if they
feel they are being advised by
the wrong adviser or getting inappropriate
advice. “The consultancy may
just have the wrong person in place,”
he says. “Many funds that we advise
now have a business plan and they
will build ‘consultant review’ into
the process – this may be every three
years, for example.”
Deane-Williams says that these days,
pension funds are more willing to
review their consultant appointment
rather than actually switch.
“After the Myners review there is
certainly more activity in this area,
which is not to say there has been a lot
of change,” he says. “It has become
best practice to review relationships
at regular intervals and to consider
investment an actuarial relationships
separately. Myners had wanted a
more competitive marketplace – he
certainly got it.”
Psolve asset solutions has had successful
year in winning consultancy
mandates, including one from the
£1.44bn Durham Country Council
Superannuation Fund in September
and another from the £564m London
Borough of Hammersmith and Fulham
in October.
“We’re finding clients have
responded very positively to some
new solutions to some well-established
challenges,” says John Conroy,
principal at consultancy Psolve Asset
Solutions. The tendering process for
consultants is now happening much
more frequently than before, he says,
and it is akin to the activity of manager
“It’s just good governance,” he says.
“People have it as part of their job to
see what is out there. Sometimes they
change, and sometimes they don’t.”
Clients are also looking for value for
money from consultants – more than
was the case before – but this does not
simply mean lower fees, says Conroy.
Fees can be linked to results. “It is
about how you arrange the client’s
engagement,” he says. “There is still
some dissatisfaction with the extent
to which consultants are on-the-hook
for the advice they give.”