Love them or loathe them
Love them or hate them, investment consultants have an important role to play in the pensions arena, but just how important a role differs from market to market. And so does the attitude towards them by other players. By and large they are more likely to be appreciated by pension funds than by asset managers.
“In some markets they play no role at all - oh happy days,” notes one Irish asset manager who wished to remain anonymous because “after all I’ve got to work with them”.
But he concedes that consultancies do serve a purpose. “Over the last few years they have stirred up our domestic market - they have raised the bar for performance and made us aware that we have to compete internationally. Domestic managers can no longer just sit back in their own back yard, and that has got to be good for clients.”
And in Ireland consultancies have been able to translate their usefulness into being a major influence on the pensions market. “The market is almost totally and utterly consultant- driven, they have a complete hold on this market,” says another Dublin-based asset manager. “Consultancies control the client and the relationship with the scheme.”
But this does not seem to worry pension funds. “The law requires that pension funds seek professional advice where it is needed and so they do use consultants extensively,” notes Nora Finn, chief executive of the Irish Association of Pension Funds (IAPF).
Ireland is not an exception. “There is a large volume of pension assets in the UK compared with other sectors and a very well developed financial services market, and as a result there’s more oxygen for consultants to live off,” notes Mark Hyde-Harrison, a leading member of the investment council of the National Association of Pension Funds (NAPF). “The trustee model that we operate, the prudent man principle, requires that trustees take advice and it’s important that they get independent advice. Consultants offer advantages at the very small end, where they stop trustees doing inappropriate things and therefore protect pension funds’ assets, and at the larger end, where they offer economies of scale. It’s very difficult for a pension fund to truly be able to review the whole market and have the skills and expertise necessarily to fully assess the interconnectivity of all the managers they have and connect it through to the liabilities that they are trying to pay in the future. So there’s no doubt that a strong, independent, quality investment consultancy industry is vitally important for a strong pension fund industry.”
Nevertheless, the view abroad is that consultancies in the UK have a vice-like grip on what pension funds do. “Nowhere in the world are consultants as dominant as in Britain, the reason being that a trustee of a British pension fund can be accused of 90 different things and go to jail,” says Benoit Fally, SSgA Brussels. But things are different in Belgium, he adds. “Here, consultants mostly play a role as actuaries although most of the big actuarial firms also provide asset management services.”
Another Belgian asset manager, who wished not to be identified, agrees. “In Belgium we have all the usual suspects - Watson Wyatt, Hewitt, Towers Perrin and so on - but many are mainly active on the compensation benefits and actuarial side and not really active on the investment consultancy side. We encounter them occasionally but the market is too small to make it profitable for them.”
The reason for the limited role is cost, adds Edwin de Boeck managing director at KBC Asset Management. “Consultants are quite expensive and most smaller pension funds in Belgium are hesitant to pay for them because it would cost them more than their asset manager,” he says. “In addition, the reputation of some consultants was damaged by their favouring an aggressive asset allocation strategy at the end of the 1990s and early 2000s which obviously did not deliver.”
However, Marnik van Impe of Hewitt Associates in Brussels disagrees with this analysis. “Belgium is a market of small pension funds and consultants play a considerably higher role in small pension funds than in large ones,” he says.
“Some of my clients [on the boards of pension funds] will look to me for every decision they have to take because the pension fund is not a full-time job for them.”
There is a detectable scepticism about the role of consultants to the north of Belgium, in the Netherlands. “We think the big consultancy firms have a strong, and understandable, desire to sell what they have to offer,” says Bram van Els of PME Metalektro, the pension fund for the mechanical and electrical engineering industries.
“But this is not necessarily what we want to buy. They have a tendency to make the problem bigger than we think it is because they want billable hours. So we like to focus on relatively unknown consultancy firms and on individual consultants because we think that they are more loyal to us. And being more independent they can take more risks. In addition, often they have a better and more creative solution to the problem that we face.”
“The use of consultants is not as widespread in the Netherlands as in, for example, the UK,” says Jeroen Steenvoorden, director of the Dutch pension fund for self-employed medical specialists (SPMS). “Dutch pension funds usually have an investment commission that advises the board on investment policy and sometimes even on specific investment decisions and the commission usually includes a few outside members with experience of the investment industry.”
This picture is repeated further north still.
“I wouldn’t call consultants vital in Denmark,” says Claus Jørgensen, head of equities at PKA.
“Historically they have played a minor role. We only use them for very specific assignments, for example if we want a special study in some area - so we have used consultants to examine the fees that we are paying for external management and to compare our internal capabilities with those of external managers. But we do not use them in the search for managers, we do that internally, through IPE Quest for example, and take it from there. And I think that most pension funds in Denmark use them the same way.”
“We don’t see them much, to be honest,” says Peter Norman, chief executive of Sweden’s AP7. “In Sweden one domestic firm, Wassum, has almost a monopoly situation. It is a joint venture with Hewitt so has an international professionalism. We sometimes see Mercer and Watson Wyatt, but not that much; they have rather a marginal role.”
“We have seen a big increase in the second pillar systems with the impressive development of Pensionskassen and Pensionfonds,” says Joachim Schwind, chairman of the Hoechster Pensionskasse and vice-chairman of the German occupational pensions association (aba).
“From the point of view of Pensionskassen, which are the dominant form of second pillar externally funded vehicle, the larger schemes talk directly to investment managers, and they would generally only turn to consultants when considering alternative investments or for help with a performance history of unfamiliar products. But our own fund, for example, does investments in bonds and gilts in-house, and most other Pensionskassen would do the same.”
Nonetheless, foreign consultancies have entered through the acquisition of a local firm. “This is more a question of accessing global actuaries, and here we have the example of BodeHewitt,” says Schwind. “This is an increasing trend, especially with the emergence of contractual trust arrangements and Pensionfonds, where the global actuary might also take a role in determining strategic asset allocation and in that function might also be involved in the process of manager selection. And with the introduction of asset liability management they might assess how to allocate the assets and with which mandates.”
The situation is similar in Switzerland, says Werner Enz, pensions writer on the authoritative Neue Zürcher Zeitung newspaper.
“Actuarial consultants can assist in getting a good grip on the risks in the pension scheme’s balance sheet,” he notes. “But the trustees should be able to define a strategy, how to invest, and there are several approaches that follow from that - they can go directly to banks, invite several parties to make offers, try to build something in-house, with the bigger ones having their own in-house portfolio manager - but I don’t observe that in investment consultants play a decisive role in this selection process.”
But the consultancy market is on the rise in France. “The assets available to our second pillar PAYG institutions have grown substantially in recent years because of over-contribution and their reserves now total some €60bn,” says Christophe Gloser, institutional sales director at Fidelity Investments in Paris. “Consequently there has been an increase in professionalism because the institutions have to diversify and take more risk - equities and alternatives. So they have started to bring in consultants, and as a result we have seen a huge evolution in the consultancy environment, going from no consultants, to only French consultants and now to a situation where the leader in the French market is Mercer and where Hewitt is one of the most prominent players. There are still some small French consultants but the main Anglo-Saxon players are now in the market.”
But the implementation of the EU pensions directive and the simultaneous introduction of regulatory changes in many countries are having an impact on the role of consultants.
“There are a number of drivers that mean pension funds need more pro-fessional advice,” says Chris Verhaegen, secretary general of the Euro-pean Federation for Retirement Provision. “There is an increase in the regulatory and supervisory burden and over the long term there is the ‘professionalisation’ of pension institutions through higher standards in accounting and in the investment process and results, new transparency requirements and a higher level of communication with the external world, be it members, the general public or reporting to supervisors.”
“Implementation of new rules and legislation always leads to an increase in activities of consultants, mostly temporarily,” says Frans Prins, director of the Company Pension Funds’ Association (OPF) in the Netherlands. “We have no indications that the implementation of the new FTK will lead to any other conclusion in this matter.”
Van Els agrees: “Consultants might now be used more, people feel insecure about risk modelling, for example, but that does not necessarily mean they will be used for the hiring of individual managers. Indeed, that’s one of the reasons why fiduciary management, where a scheme outsources more or less everything, has become so popular in the Netherlands.”
Finland is also undergoing regulatory changes. The adoption of the Puro Commission’s proposals to liberalise the asset management of pensions institutions has increased an executive board’s responsibility for risk management and all the risks entailed in each investment, says Matti Leppälä, director responsible for international and legal affairs for the Finnish Pensions Alliance.
“Consequently, one could foresee an increasing need for outside expertise.”
The trend may be similar in Sweden, where the EU directive coincided with the introduction of a traffic light system.
“We detect that some pension funds have asked for consultancy help,” says Cecilia Skingsley, a financial analyst at business newspaper Dagens Industri. “There is a difference between pensionskassa, pension schemes, and a pensionsstifelse, where an employer retains the liabilities but pays money into a vehicle that manages it to be able to generate returns to lower the employer’s future pension costs. The pensionskassa are increasingly moving to liability driven investment cash flow matching, and they definitely needed consultants to assist with this.”