Value for money?
The cost of something depends on people’s willingness to pay the price. In pension consulting it requires them to place a value on advice where local knowledge is vital and limits cross-border competition and so the UK leads the way in charging clients the most.
In part this is because of cultural issues. In German, for example, an actuary is translated as insurance mathematician, according to Tim Reay, international benefits actuary at Hewitt Bacon & Woodrow. “The expertise required there is less predictive modelling and more that of a technician, following the law.” If the services required are commoditised then charges are lower and sometimes fixed rather than based on an hourly rate.
Reay says: “Fixed fees reassures clients and, when the work is simple and following guidelines, low cost. A termination indemnity plan in France is, say, £1,000 to (E1,427) £2,000 for example, for example.
“This cost increases by a factor of 100 in complex UK schemes with different benefits and mergers of companies – five large figures or more. Although processes are becoming more efficient plan complexity is increasing across Europe, for example as a result of grandfathering existing rights in new schemes in Germany.
“In southern Europe benefits are paid by the state with top up plans for small groups. In France, where executive top up the state benefit, it can be less important to have exact figures, just 95% approximations, which reduces the work load. But in UK, Netherlands and Sweden the actuarial valuations are lengthy and can be critical for the company’s finances so have to be more accurate.”
Hourly rates in the UK and US can be between £100 for junior consultants to £400 for senior managers in UK and US, he added. UK costs were broadly the same at most of the top houses, such as Hymans Robertson, Watson Wyatt, Mellon and Mercers.
Andrew Kirton, head of UK investment consulting at Mercer Investment Consulting, says: “Hourly rates are similar – up to £300 to £400, whether by accident or design, from market discipline.”
The Society of Pension Consultants said value not price was key. Roger Mattingly, head of the Society and employed by HSBC Actuaries and Consulting, says pension consulting, which is split between actuarial and investment consulting, scheme design and trustee relationships, was “value driven, not price sensitive”. And, he adds, investment consultants were remunerated more on results than on time.
And Keith Robinson, operations director at Aegon’s UK distribution arm, says his corporate clients pay on a fee basis for a menu of services where “price is important but breadth of service is the over-riding consideration”.
In Europe fees are lower than in the UK. Keith Faulkner, head of the investment consulting practice at Hymans Robertson, says: “The UK rates are the highest in Europe, apart from Switzerland, although I am not sure why they are so high there.
“It is much cheaper in southern Europe, such as Portugal, Spain and Italy because they were small economies with lower cost of living or have had lower demand for pension consultants.
“In Germany and the Netherlands companies sponsoring pension schemes tend to be more self-sufficient and rely less on outside consultants, thereby weakening demand and rates of pay.
“In France the standard way of remuneration is by commissions from insurance companies for providing business, which as well as being a potential source of conflict of interest means it is hard to know the exact remuneration. ”
However, the continental European practice of paying commissions for advice as part of a bundled package from an insurance or investment house was still prevalent although less common and more transparent for bigger schemes.
Faulkner, for example, says Hymans Robertson did accept commissions in place of fees for group life or disability insurance but this was offset and transparent to clients.
Christopher Mayo, a partner in the international consultancy arm of Watson Wyatt, says: “Independence is critical in UK. Independence from brokerages and commission, which is prevalent in Europe. To be locked into an insurance contract for pensions is valuable to insurers. We are paid solely by fees but in Belgium and the Netherlands with good funded schemes commission was an issue.
“For France, Italy and Spain have fewer funded schemes and it is not such an issue. In Germany it is unfunded pension schemes. But the use of commissions is declining, as happened in the UK.”
Peter van Solinge, managing director at Aon Consulting in the Netherlands, says typical hourly fees in the country were between E150 and E200, up to maybe E250 for a senior consultants.
Jan Bernhard Waage, managing director at Nordic consultants Wassum, says the hourly rates were between SKr1,500 (E164) to SKr2,800, although there was some fixed rate work.
And fixed rates are increasingly common. David Fairs, a partner in the people services practice at KPMG, said in the current economic climate many clients are looking at fixed rather than open-ended fees to control or have certainty of costs.
But fixed fees could affect professionalism of service, according to Mr Reay at Hewitt Bacon & Woodrow. He said the firm did some fixed fee work in actuarial valuations or account consolidation. But “only if we could make sure professionalism is not questioned by fixed fees if that would encourage cutbacks”.
Mayo at Watson Wyatt said a set fee for clearly defined projects, such as actuarial valuations, administration or pure compliance with regulations, where the cost is down in real terms as it becomes more commoditised and IT helped clients.
Modelling work added value, he says. “Clients get most from risk management. Cost is increased by our proactivity in benefit redesign to share risks with employees and innovation, such as stochastic modelling (looking to the future to predict contributionary outcomes) and moves from pure defined benefit to defined contribution funds, or a hybrid of both.”
And the increasing number of moves from DB to DC pension schemes affected the services offered. Adrian Mathias, an actuarial partner at Watson Wyatt, says final salary schemes were a mature market, and money purchase pension funds had different needs; with new competition from non-traditional players and manufacturers. “It is less actuarial work but more counselling – over the web, for example.”
Web tools to populate data and leading to consultants to look to innovations and more value added services. Reay says: “Web tools help put results together in same format, which is efficient, and allow clients to populate data sheets saving them money. This can save a quarter or half on consolidating fee, which could be as little as £20,000 or as much as actuarial valuation. It depends on the auditors on the amount of work needed.”
Although hourly charging was most common, Kirton at Mercer in the UK, which is owned by US giant Marsh & McLennan Companies, as well as using hourly and fixed rates, says: “Sometimes, for those clients we give regular performance reviews too, we can take a retainer fee for a flat 12 months to take the surprise out of the equation – this can be from £40,000 to £150,000. For a handful we use performance-related fees when it came be monitored against a benchmark.”
And Hartmut Leser, managing partner at Feri Institutional Management, says: “We negotiate fees with our clients on scheme design, asset liability studies, manager selection, manager control and structural issues. Typically rates are fixed or permanent contracts, which relate to total assets ion the scheme, usually plus or minus one basis point. Small schemes (from E300m) are usually charged on a fixed price.
“We rarely charge hourly because clients are permanent and it is a pain when you call them or there is a meeting to charge as it is not good for the atmosphere. With hourly rates, although I do not know about padding, it can be willingness of client to pay that sets the fees.”
As in any business, therefore, if the advice needed is business critical it is worth paying the money to get the best possible advice – as it could save billions – but the more attention to the cost of basic services and use of technology can save the scheme sponsors money.