Across Europe consultants have fared very differently in the past year. Common to almost every country are many similar themes- the shift from DB to DC, companies appreciating the potential risks of their schemes, the question of how to react to falling stock markets and dwindling state provision- and above all, the shock and aftermath of September 11. Nevertheless, the various countries differ in
the extent to which they have made
these changes. Consultants in the UK have been worked off their feet, for example, whereas consultants in the Spanish market have been able to put theirs up after
what was a frantic 2000.
The UK is a fair place to start as it has been host to the most dramatic changes last year. Publication of the Myners review last summer raised the issue of accountability in running a pension fund as well as pressing the case for outsourcing to consultants. According to Jon Bailie, managing director of institutional investment at Frank Russell, the drive for accountability predates the report but that publication provided impetus to go down this route. It is this issue of delegating responsibility that has led many consultants to get more involved in the implementation of investment strategy. This has manifested itself in Frank Russell’s manager of manager approach and Watson Wyatt’s implemented consulting and Bailie says that there is now evidence that some trustees are taking this to heart and are employing consultants to whom they can delegate the hiring and firing to.
This is but the half of it for UK pension funds. Other events in 2001 include the advent of the new accounting standards FRS 17, Unilever suing Merrill Lynch’s Mercury Asset Management for negligence and the crisis facing Equitable Life. These are covered in more detail (box page3) but as Alan Botterill, Towers Perrin’s managing director for Europe, says: “Myners’ report is just one part of the jigsaw.”
Nick Fitzpatrick, head of investment consulting at Bacon & Woodrow, which is in the process of merging with Hewitt Associates, sums up the situation facing UK pension funds. Calculating benefits and liabilities on market value under FRS 17 had made it easier to make a straightforward comparison. Given the terrible returns in the last year, he says that many sponsors have discovered a large liability, one that is growing due to increased longevity and to falling interest rates. Discounting future cash flows at lower rates increases the value while deflated equity markets means the value and return of the assets are down.
This state of affairs has raised the profile of how important a pension fund can be and that fact that the way some are run does not perhaps reflect their significance. “Along comes Myners and says ‘you’re not giving it the importance you should have’ and so his report is falling on very fertile ground because companies are realising that this is damned important and that Myners is dead right,” he says.
Germany comes closest to the UK in terms of changes to the consultancy market. Changes to the pensions laws have led many companies to approach consultants for assistance. The changes to the legislation are notoriously complex but their effects are covered below. Other developments in Germany are afoot, not least a shift in the way German multinationals are approaching retirement strategy. In the past they have taken a more hands off allowing subsidiaries a relatively autonomous existence rather than dictating retirement policy, a practice normally associated with US multinationals. “What we’re finding now is that in the last year, we have been talking to a number of large German multinationals about managing their retirement programme on a global basis,” says Jacques Goulet, Mercers’ retirement practice leader for Ireland and continental Europe, who believes that this trend will favour the larger international consultants over the local stalwarts.
Scandinavia has also produced much work for consultants in the past 18 months. Prior to that, work was scarce but the use of investment consulting has increased enormously. One of the most publicised event recently has been the launch and progress of Sweden’s’ PPM system. Fitzpatrick says that in the last five years the Swedish market for investment consulting, for example, has gone from virtually nothing to Europe’s fourth largest thanks to a change in attitude towards saving. Sweden’s PPM approach means that the state scheme is funded, everybody is part of a funded scheme and therefore needs investment advice. Bacon & Woodrow has recently signed a co-operative agreement with Swedish consultant Wassum, the rationale behind which is explained by Fitzpatrick. “The Scandinavians have a large savings pool and that is where investment consultancy flourishes.”
More specifically, the Danish market is one picked out by consultants as promising. “The Danes are very forward thinking,” says Bailie at Frank Russell. Here is a country with numerous sizeable pension funds that Bailie believes are coming to realise that perhaps their set ups are less than perfect. “Denmark is going to be a very interesting market in the next few years,” he says.
Changes to legislation in Norway have proved a catalyst to the switch to defined contribution schemes and many consultants have reacted accordingly. Wassum opened an Oslo office last year as did Mercers last January when Marsh McLellan’s employee benefits department set up an office under Mercers’ name. “A lot of companies are going to review their plans as a result of the new legislation,” says Goulet.
France, host to funds not normally seen as excessively keen on consultants, is now perceived as more encouraging. Although from a consultant’s perspective it is relatively small market, at the top end the savings plans are coming in and, according to Botterill, companies are beginning to think about the concept of the balance between the contributions they make and state provision. Gradually companies are introducing the saving plans and consultants are inevitably getting involved in this.
Both Towers Perrin and Mercers agree that French multinationals are beginning to think about how they should be managing their benefits on a global basis. Historically French multinationals have not been particularly active at managing global retirement plans. Both consultants say they have been approached by French multinationals who want to reassess their provision for overseas employees. According to Goulet at Mercers there is more at stake than just taking control of the fund. Rather it is getting up to speed on the overall issue of retirement provision and taking stock of retirement provision around the world.
In the Netherlands, there is more interest from the small and medium sized pension funds in terms of investment consulting. But according to research by Vrije University in Amsterdam and Frank Russell, governance among some small and medium-sized Dutch funds is sub-standard. Although the largest funds have a well-defined division between setting, implementing and controlling fund policy, their mid-sized and smaller counterparts lack similar structures. Also highlighted was a problem many UK trustees will be familiar with- the lack of time they are able to dedicate to running the fund. The research found that in over half the cases the board members of small funds spend less than five hours a month on fund business. “Governance is going to be a bigger issue for pension funds in 2002,” says Bailie.
Spain has seen a far quieter year than in 2000. Companies had originally been obliged to externalise their book reserves to either a pension fund to an insurance company by December 2000 but protracted negotiations with the unions forced the government to extend the deadline to next November. Such was the pressure in the run up to the 2000 deadline that consultants were inundated. Says Botterill: “It has slowed from a frenetic pace last year when you simply could not get the work done and this delay of a couple of years has given everyone a little breathing space.”
Although there is another deadline towards the end of 2002, most of the plan design is complete and it is just a matter of filing the papers. So although there remains a little actuarial work for consultants, most of the larger companies have established funds and are subsequently looking for investment consulting advice. There is also the issue of what to do with the fund and how to get the employees involved so although the pace for consultants will pick up from the lull this year, it is unlikely to reach that of 2000.

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