New models but same game
A lot is expected of pension trustees these days – more than is reasonable for them to cope with on their own or relying on just their current advice, some would say.
However, they are being offered affordable extra help, including for the provision of investment banking-style services that they never knew they could get before. To be able to do this, consultants have either redirected hard-won, pricey experience from elsewhere in the City of London or have stretched out their long careers within the pensions and investment industry.
EPIC Investment Consulting, a federation of semi-retired investment managers, is an example of how such expertise has been made available to pension funds.
Chris Edge, chief executive of EPICIC, explains that the business was set up in June 2003 as a result of two converging forces. Pension schemes were beginning to go ‘pear-shaped’, while at the same time there was a pool of people in their mid-50s who were past a certain stage in their careers and who wanted to get out of the 9-to-5 rat race or who had taken early retirement, but still wanted to keep doing something. Surely, it was thought, these bright 50-somethings could be of use.
“We experienced the full market cycle and the recession of the 1970s when inflation was up to 25%,” says Edge. “It helps to have known and seen it. It gives you a longer view of investment returns.”
At the very least, EPICIC’s consultants will offer trustees a second opinion on investment decisions. “Investments issues are what matter,” says Edge. “Pension schemes are under the cosh because of liabilities and deficits, but the best way to manage your scheme effectively is to maximise the financial returns of the scheme and come up to the mark on investments.”
The difference between EPICIC’s consultants and standalone individuals is that the EPIC umbrella certifies that they are FSA regulated and carry professional indemnity insurance cover. And although they work from wherever they happen to be and communicate via the internet, they also have secretarial support and offices in London, where regular meetings are held.
If a contract is the offing, a management committee led by Chris Edge will allocate the work. EPICIC’s list of consultants and contacts includes Peter Murray, formerly chief executive of the Railways Pension Trustee Co, and Keith Faulkner a former Mercer worldwide partner who now runs his own Pension Adviser Review business for the regular market testing of actuarial assumptions.
Paul Jameson and Jonathan Dawson, founders of consultancy Penfida, each spent 20 years as investment bankers at Lazard. They left in July 2005, a couple of months after the firm’s IPO.
The public flotation involved negotiating the terms of Lazard’s pension fund, of which they had both served as chairman. “Having done that and having seen some corporate deals over the last two years where pensions have been a pivotal issue, it was clear that there was a lack of investment banking resource targeted at the pensions sector,” says Jameson.
There may be little wonder in such a lack of resource, given the absence of additional, lucrative investment banking mandates surrounding a pension scheme. However, three-partner strong Penfida has set out to provide the kind of corporate, financial advice needed by pension trustees and schemes.
“A trustee is asked to evaluate the covenant of the sponsoring employer,” says Jameson. “The trustee has to determine if the funding is affordable, set a plan for making up shortfalls, and is required to respond to exceptional corporate events. So if a company receives a takeover offer, or refinances or restructures, or goes through a leveraged buyout, then the trustee must appraise the situation.”
A key analogy is with the duties of a non-executive director, he adds.
Already busy in the same space
as Penfida, is Gazelle, an independent corporate finance and debt advisory firm. Donald Fleming joined the firm in 2005 to lead the development of its pension trustee advisory business, after having spent 11 years at Cazenove, where his focus was on advising the boards of investment trusts.
Fleming has a similar view to that of Jameson in terms of the kind of financial advice a pension board needs. “It’s about understanding capital structures and cash flow, assessing the sponsor’s covenant and the ability and willingness of the employer to fund pensions,” he says.
“It is about bringing that broader experience of the capital markets to bear on the trustees behalf, so that they really understand the impact of corporate events and things which might affect a company’s financing.”
Gazelle’s investment banking heritage - it was founded in 1996 by ex-Morgan Grenfell banker Simon Willes - is what sets it apart from the accountancy firms to which trustee boards have typically turned for corporate finance advice. Trustees now have to concern themselves with matters that suit the more market-based approach of investment bankers, suggests Fleming, such the interaction between a company’s shareholders and bondholders.
The corporate analogy comes out again: “Trustees are in a similar position, when a pension scheme is in deficit, to bankers negotiating with the company.”
Another factor driving the need for corporate finance advice is that the management board and the pension trustee board are beginning to assume separate identities. Historically, the finance director sat on both, but there is a growing fear of a conflict of interest. “The trustee board is charged with understanding how the company finances the pension scheme, at arms length. In some situations, it can be difficult for it to know what is happening, and an outside party can act as a conduit,” continues Fleming.
While Gazelle does give advice on an ad hoc basis, such as when there has been a disposal or a takeover approach, Fleming highlights the firm’s recent appointment as ongoing financial adviser to a major scheme on a relationship basis. “This is conventional in the corporate world, but novel for a pension scheme,” says Fleming. “The quality of advice is enhanced, if there is an existing relationship,” he adds just as with a good, old-fashioned corporate broker.