In it for the long term
Bedfordshire Pension Fund
Head of pension fund management
• Invested assets: £1.2bn (€1.4bn)
• Members: 44,000
• Funding level: 80% (2007)
• Date established: 1920
As a UK local government pension scheme, we have to take expert advice before making any investment decisions - that is why we hire consultants.
Our current actuarial and investment consultants come from big firms although the actuarial one is slightly smaller, as it specialises in UK local government pension schemes (LGPS). Our investment consultant is a large global company, which we chose because it offered the right mix of skills and experience we were looking for.
Some smaller consultancies have started to appear across the LGPS adviser network and we would not necessarily rule them out from any exercise we do. However, we are in quite a specialised investment field and therefore need to have some confidence that our consultants know the markets we are in. Across the whole of the UK local government pension schemes there are only a relatively small number of consultants who currently have retainer contracts.
We have been with our current consultant for just over two years. Prior to that we were with another global consultancy for over 50 years. Following the guidance of the Myners principles - which codify best practice in investment decision-making in the UK - to challenge or market test the advice you receive as a pension fund, we did market test the advice received from our previous consultants and decided to change the consultancy as a result.
Our current contract is about to end and we anticipate to be going back to the market shortly for a five-year contract. The reason we had such a short contract is because of the dramatic changes to the group of our quasi trustees. It did not seem appropriate to sign them up to a long-term deal with somebody and we felt it was better for them to establish their own rapport with a consultant.
We have been quite happy with the performance of our consultants and the fund, I believe, is in a better position than it would have been if we had not used any, although that is difficult to quantify.
They have been able to point out some scenarios to us, such as, for example, the corporate bond market about a year ago. On top of that they have indicated whether we should be overweight equities, bonds or commodities, so they have been trying to steer us through the financial crisis to some extent. But our contract with them is not in terms of full investment asset market advice. It only covers an annual asset review among the services provided.
Head of asset allocation
• Invested assets: SEK100bn (€10.1bn)
• Policy holders: 800,000
• Pensions and life insurance company
On the investment side, we use consultants purely for asset liability management (ALM) modelling purposes. Other than that we use them for issues such as the implementation of Solvency II, the set of regulatory requirements for insurance firms operating in the EU.
While we are not always doing it we could run our ALM model on a monthly basis. Of course, we do not always involve consultants for this but we talk to them regularly for most improvements in the models, whether it is for help or a second opinion.
On top of the at least quarterly reviews of our portfolio, we undertake a so-called reference portfolio analysis for our asset allocation every few years, for which we use the ALM model for help.
So when it comes to our asset allocation, we use consultants on an ad hoc basis, while for issues such as Solvency II implementation we would hire them on a project basis.
We have been using our UK-based global consultancy for more than five years. Before we hired this particular consultancy we did an analysis of the things consultants needed to help us with and decided this one met our requirements.
And we have had a good relationship with the firm since. Recently we also had a meeting with another consultancy about economic scenario generators.
While our intention is not to buy the generator, we had some in-depth discussions about how we should use specific economic scenarios in our ALM model.
We feel that the consultancy we use has added value to us as a life and pensions insurer. We can measure their work by evaluating our solvency capital requirement (SCR) calculation for the improvements they have undertaken in our ALM model. On the pure asset side or on Solvency II their efforts are more difficult to judge, although we believe we have a better model with regard to Solvency II. However, we did not make any particular use of them during the financial crisis and do not believe we would have gained an advantage from that.
There is no law in Sweden telling us to make use of consultants. However, I believe other Swedish pension funds and insurers probably have a similar relationship to ours with their consultants. Many other life companies, for example, use international consultants for the economic scenario generators and frequently buy them from them.
Pensioenfonds SNS REAAL
• Invested assets: €1.7bn
• Members: 18,000
• CDC: Collective defined contribution
• Funding level: 133.5% (December 2009)
• Date established: 1997 as Pensioenfonds SNS Bank’s insured scheme, 2004
as Pensioenfonds SNS REAAL (own risk), CDC scheme since 2005
We have never used separate investment consultants. For our asset liability management (ALM) study, which we have just finished, we decided to employ an organisation which specialises in ALM studies as advised by our actuarial consultant. Currently we are in the process of transferring the results of the ALM study to our asset manager.
We have employed two international firms as our actuarial consultants since 2006 and have not changed them. We differentiate between the advisory and the certifying part of the business: therefore these are split and we use two separate actuarial firms. When we held a beauty parade for actuarial consultants a few years ago it was not very common to have this split. But because we chose to follow that path we felt that particular advisory consultancy was most suited to our needs. While the actuarial consultant does the day to day advising of the pension fund, he also pointed us towards the other global specialist manager for ALM studies.
All of the investments are undertaken via our fiduciary manager who, apart from advising the pension fund, selects, monitors and terminates external managers, consolidates all the reports and invests in certain products on behalf of the pension fund.
The reason we have not hired any separate investment consultants yet is because we have not felt the need for them on a day-to-day basis. If you consult them only once in a while, though, the question arises how dedicated they are and how quickly they become familiar with the way the pension fund invests and wants to invest money.
What we have instead of an investment consultant, though, is an advisory committee on investment. This investment committee, combined with our asset manager, functions as an investment consultant.
As an insurance and banking company, we also have people with the required knowledge and access to information in-house, who can sit on the board of the pension fund’s investment committee. One of our board members, for example, does the ALM for the bank. Therefore, he is used to dealing with the interest rate risk and how to hedge it. Other board members have different areas of expertise.
However, this is an unusual situation in the Dutch pension funds industry. There are plenty of investment consultants in the market and most pension funds in the Netherlands do make use of them in one way or another.
Interviews conducted by Nina Röhrbein