This month's Off The Record survey focuses on pension funds' use of investment consultants and their satisfaction with the services provided. Some 62% of funds said they used investment consultants on a retainer basis, while 38% did so on an occasional or project basis.

The majority of pension funds evaluated investment consultants' services positively. For 57% they provided good independence of advice, asset allocation expertise, and product and strategy knowledge or expertise.

However, 50% of respondents had mixed views as to whether consultants had added value to their investment portfolio. A UK fund said: "[Their] advice has taken us into asset classes just as the market has turned, and recommended managers have not always been stable". A Swedish fund added: "Consultants tend to say what they think you want to hear, [but this is] not always what is best for the plan." A total of 36.5% of funds felt consultants had added value to their investment portfolio, while 13.5% felt they had not.

Among pension funds that used investment consultants for asset class or investment advisory services, most used them for fixed income and equities (both 68%). This was closely followed by asset allocation and hedge funds (both 63.5%). Other common uses were for real estate and asset liability management (both 54.5%), 45.5% for derivatives (excluding LDI swaps), 36.5% for both private equity and LDI and swaps, and 32% for commodities. Just one respondent used investment consultant services for ‘exotic' alternatives such as event finance and CAT bonds.

Some 36.5% of respondents had identified a conflict of interest with their consultants, a Swiss fund found that "one of the evaluated fund managers was a client of the consultant, [which] had not been disclosed in advance". A majority of respondents (62%) use more than one consultancy firm, with a Spanish fund stating that actuarial and investment advice must be independent by law.

Half of respondents felt that investment consultants are better placed than asset managers to offer asset allocation advice to pension funds. A Swiss fund explained: "[There is] no conflict of interest [and a] broader universe of investment possibilities". A UK fund added: "Individual managers would find it difficult to offer objective advice on asset allocation to a pension scheme".

Over 57% of funds stated that investment consultants enjoy too much influence in their country. "Trustees often depend on investment consultants too much and just buy whatever they sell, because legally they are better off taking the advice. Consultants have a money machine in a pension trust, as they can advise more and more and sell different products (cross selling)," said a UK fund.

Just 18% of respondents said that larger consultancy firms would be likely to win their business in the future, although a further 27.5% said they would be likely to use a larger firm for core advice, and challenge this with specialist satellite advisers from time to time. The majority of respondents said they would not be likely to use larger consultants, and a Dutch fund said: "Bigger is certainly not the same as better. Small firms may [give] more attention [to] their clients and offer better service". Over half described their current investment consultant as a global firm, 30% as local and 10% as boutique/individual.

Approximately 42% of respondents said their investment consultant had provided them with bad advice at some point. "They have recommended managers whose performance has been indifferent, and also recommended that managers be terminated when their subsequent performance has been impressive," said a UK fund. Some 58% said they had awarded an investment mandate to a manager not on their consultant's approved list. A UK fund said it had done so due to "personal involvement with, and knowledge of the firm and individual directing the firm; [the manager was] not on [the consultant's] list due to ‘lack of track record' - by the time the track record is established you have missed the boat".

Respondents were very clear that investment consultants could serve the pension fund community better. An Icelandic fund stated that consultants needed "better skills [and] less conflicts of interest". A UK fund felt they should "continue to drive ALM advice, continue to analyse managers, continue to advise in favour of devolved decision making, [and] become true managers of managers in a competitive market. [They should] stop pretending to be TAA managers and realise their limitations."