Legislation keeps consultants on their toes
Pensions consultants in the Iberian peninsula have seen business volumes swell over the last few years as the pensions industry digests legislative change. But firms in Spain have also had to adapt to a drop-off in demand for some actuarial work.
In the period between 1998 and 2002, pensions consultants in Spain were largely focused on undertaking benefit design for their clients, says Alicia Sanmartin, managing director Spain of Buck Heissmann. They were mainly involved in transforming book reserve schemes into employee qualified pension plans and - or - group life insurance, she says, and in transforming defined benefit schemes into defined contribution plans.
“After that, firms had to rationalise their business, downsizing actuarial services,” she says. “But in any case, benefits consultants offer a broad range of services in investment, communication and compensation to help
clients,” she adds.
The broad change in the basis of pension plans over the last few years has changed the type of services that are called for, says Ramon Cuerno, director of Aserplan, a small Madrid-based consultancy.
Aserplan deals with the more traditional side of pensions consultancy such as actuarial work and benefit design, he says, although it also provides some general investment advice. “In Spain, most defined benefit (DB) plans have been replaced by defined contribution (DC) plans, so demand for actuarial services has really declined since 1995,” says Cuerno.
On the other hand, the introduction of IAS19 has increased the amount of actuarial work, he says. The accounting changes only affect the larger corporations, he points out, and says that Aserplan is undertaking actuarial work related to the pension schemes of some multi-national companies in Italy and South America. The firm is also busy helping these companies conduct negotiations with the social partners involved, he says.
In Spain, pensions law now prohibits the use of book reserves to fund retirement benefits, with a few exceptions. Employer-sponsored pension arrangements have to be funded as separate pension funds or through insurance contracts. The number of qualified pension plans has been increasing over the last few years, but many employees do not have access to them, because their employer is too small to justify setting one up, says Cuerno.
“Everybody has to have the right to be in a pension scheme, so in Spain, the implementation of benefits often has to be through an insurance contract,” he says. His firm has been helping several clients manage their insurance contract and negotiating the terms with the insurer on the client’s behalf, he says.
From an income tax perspective, pensions arranged via insurance contracts are as good as qualified pension plans, because employees receive contributions gross, with benefits being taxable, says Cuerno.
Sanmartin says the market in Spain is dominated by international consultants. Next year, a new income tax law is due to come into force in Spain which will affect the taxation of private pensions. She points out that only around 1.5m people in Spain are members of an employee qualified
pension plan, out of an active population of some 16m. “It’s clear that there will have
to be changes to improve market (coverage), but we don’t foresee changes in the short term,” she says.
But many pension plans in Spain are small by European standards, says Sanmartin, and there is simply not the economy of scale necessary to justify the use of external consultants. In these cases, the administration and investment of a plan tend to be done by the plan’s asset manager or ‘entidad gestora’, she says.
“In subsidiaries of US and European
multi-nationals and large domestic companies it is common to use consultants,” she says. “We believe that independent investment advice is valued when there is enough knowledge about investment, and of course knowledge about investment is growing among pension plan participants - so something is changing,” she says.
More than specific services, says Sanmartin, clients are looking to consultants to provide effective solutions to their problems and help them to maintain their leadership in the market - for example, through mergers and acquisitions. Primarily, clients are looking for “excellence” in a particular field, but they appreciate it if the consultant is able to provide good services in other areas as well, she says, which is not easy.
In Portugal, the pensions consultancy market is very competitive, says Bernard Thomas, senior consultant at Watson Wyatt in Lisbon. Both international consultants and domestic fund managers are vying to offer a similar service, he says. “The investment consulting market too is competitive, with not only the traditional international consultants being active
but international fund managers also offer asset allocation optimisation services,” he says. Legal changes in the country’s pensions system have boosted demand for advisory services. “The new pension fund legislation has introduced new dynamics into the market recently with clients needing to carry out ALM studies for their DB plans and establishing pension committees for all plans,” says Thomas.
And there is more change coming in 2007. “We expect the industry to change further next year with the new social security rules coming into effect,” he says.
Plan sponsors tend to use a variety of resources to help them with the issues they face, says Thomas. “Some use employee benefit consultants, some use pension fund managers and insurance companies, some use internal resources, while others use a combination of the above,” he says.
“There is a trend for plan sponsors to use more employee benefit consultants certainly for plan design issues.” Pensions clients are also coming to consultants for help with employee communication, he adds.
Thomas sees the relationship between
consultancy and client as one that deepens over time. “We find that the more we work with a client the more they tend to view us as partners on an ongoing basis,” he says. “Typically the DC work tends to be a
one-off project whereas DB work tends to be ongoing regular work.”
The largest consultancy in Portugal in terms of staff numbers is Mercer, followed
by Watson Wyatt. Thomas says the major players have a stable market share and that there seems to be little movement in clients from one firm to another or new players.
“The consulting industry is challenging in Portugal but with a growing future as clients seek increasing value for the money that they spend,” he says.