Pillars of the community
Clients warm to professional advice
Recent developments in Austria’s pensions industry have helped the cause of the country’s modest consultancy sector as clients warm to professional advice. Since the 1990s, pension funds have used consultants to help with the switch from book reserve to defined contribution pension schemes.
But over the past year consultants’ work has typically been associated with reform of the severance pay system. Under the new framework the old severance pay system is being transformed into new employee welfare funds, the Mitarbeitervorsorgekassen (MV-Kassen) to which employers will contribute a proportion of employee gross pay.
One source of controversy has been the government’s decision to introduce new financial service providers to manage the system. To date, nine providers have been authorised to manage MV-Kassen. Consultants have subsequently been inundated with enquiries about how to make the move and which providers they should choose.
“Our role as consultants is to choose is to help clients select the funds,” says Kurt Bednar, head of Austria at Mercer HR Consulting in Vienna.
Although consultants are on hand with advice, few companies have moved wholeheartedly into the new funds. In this respect Paul Roettig, general manager at Hewitt Associates in Vienna, says consultants are in a strong position once companies choose to embrace the new structure.
At consultancy firm IPC in Vienna, managing director Gerald Moritz agrees: “even though the providers are more or less ready the interest among employers has been low because there are a lot of uncertainties stopping them choose a provider”.
IPC is advising clients not to delay the decision. “They shouldn’t be too worried about one competitor being cheaper than another. Instead they should focus more on other issues such as their investment structure and their capacity to handle these accounts in a cost-effective way.”
Both local and international consultants agree that the switch to MV-Kassen is likely to occupy them for the coming year. They also report an increased interest in investment consulting. Says Moritz: “employers seem to be better informed on investments and they want to know more about these issues. Investment consulting is an area that it is growing and will be very important in the future.”
So much so that Mercer’s Bednar believes there is room for more international consultants in the market, so long as they are willing to open an office in Austria.
ALM studies in demand as returns shrink
After two years of disappointing investment performance, institutional investors in Belgium are more aware of the need for independent advice when it comes to deciding their investment strategies.
As has happened in neighbouring countries, pension funds and other institutional investors are now more willing to pay for consultancy services than they were a few years ago, thus helping local and international houses to see their client base grow.
As investors face the revision of their approach to investments, and growing liabilities put extra pressure on achieving better returns, the demand for ALM studies has been great.
“Pension fund boards have to provide statements of investment principles so they need ALM studies to support them,” says John Heymans, consultant at Watson Wyatt in Brussels.
“During difficult investment periods like this one, having a document that clearly defines what their investment guidelines are is becoming increasingly important because they need something upon which to base their strategies,” he says.
Heymans says there is a clear trend towards formalising investment strategies and this is why the role of the consultant is becoming more important.
Apart from ALM studies, defining specific benchmarks and mandates and manager selection are among the services that investors in Belgium are demanding from consultancy firms.
However, the consulting market remains relatively restricted to the upper end of the scale. “Only the larger pension funds are requesting these type of services and there are only a few consultants offering this,” says Paul de Smet, a partner at Conac.
In Belgium, the majority of funds are small to medium-sized and opportunities therefore remain relatively scarce. “The market is small so I would say there are no more than five or six manager searches per year. At present there are around 270 pension funds in Belgium and this number is increasing but most of them are small funds using a single manager and investing through investment funds,” he says.
Consultants are also playing an important role in introducing new strategies in the market and helping investors to chose managers. On the manager selection side, Conac, Buck Heissmann, Mercer and Watson Wyatt have secured most of the work.
The future looks a little more promising, according to consultants, thanks to the introduction of the Vandenbroucke law that seeks to encourage the country’s supplementary pension system. This move could change the profile of the average Belgium fund.
Many consultants are convinced that the new legislation may promote the creation of industry-wide schemes that will require investment advice as well as help in the initial launch.
Increased activity shows market’s potential
Alongside Italy, France is still one of the European markets where investment consultancy has yet to become an institutional mainstay.
Less than one consultant is employed by investors for every e1bn of institutional assets, compared to between six and seven consultants in the UK, and three in the Benelux countries, Spain and Portugal.
The reason is that the shape of the whole institutional investment sector is still far removed from the Anglo-Saxon model, despite continual noises in this direction from successive governments. Pension funds, apart from those run by multinational organisations, still do not officially exist in France. The pensions industry is made up of pension agreements or arrangements through employers. All eyes are on the latest administration to see whether this will remain the case.
Consultants in France provide their corporate pension clients with a number of services including manager selection and ALM work and are increasingly being asked to look after the ongoing monitoring of the mandate, according to Dominique Piermay, vice president of consultant Fixage in Paris.
“I think that basically an increase in the use of consultants for investment tenders and the monitoring of managers has been the main trend in the last year,” Piermay notes.
One area that continues to provide more work for consultants is the ‘Epargne Salariale’ regime, introduced in 2001 to encourage employee saving through their employers.
As a result, the investment consulting business in France, although small, has been growing. Activity in the market has reflected this potential.
Last year, consultant Hewitt Bacon & Woodrow entered the French investment consulting market with the purchase of the investment adviser Finance Arbitrage.
Nick Fitzpatrick, global head of investment consultancy at Hewitt Bacon & Woodrow, comments: “Legislation in France has changed in such a way that it is going to encourage saving and the growth of financial consulting both in terms of monitoring and the general issue of constructing a portfolio and picking who you have to manage it. The market is young and the changes are relatively recent but it’s an exciting area.”
Innovest, the US provider of research and ratings of environmental and social practices, also opened an office in Paris in response to a growing demand for socially responsible investment products in France and southern Europe.
Watson Wyatt consolidated its position in the market with the appointment of Simon Desrochers as head of benefits consulting, after a stint with BGI in Paris.
France then still shows potential for consultants and observers say there is a place in the market for both smaller local consultancies and branches of international operations.
Market in transition needs advisers
Reform of Germany’s pension system and the introduction of new savings vehicles have increased consultants’ workload significantly. On the administration and actuarial side, complex regulatory changes have led investors to seek external advice to guide them through the transition while, on the investment side, poor performance and the need to improve investment strategies is also forcing investors to employ consultancy firms.
Another important issue facing consultants is a change in attitude towards what constitutes ‘independent’ advice. Much consultancy work continues to be run according to traditional banking relations although consultants say investors are increasingly looking for help from professionals outside the financial institutions and are, more importantly, prepared to pay for it.
Harmut Leser, managing director of Bad Homburg-based at Heubeck-Feri says, institutional clients in Germany are now more willing to hire a consultant than they were only a few years ago, both on the actuarial and the investment side.
At Towers Perrin in Frankfurt senior consultant Erik Crawford agrees. “During last year there has been an increasing demand for asset liability studies and manager searches.”
Local consultants continue to control the largest proportion of the market due to their stronger presence and experience in the German market, but also their closer personal relations with the pensions world.
Crawford reiterates the prevalence of local consultants but believes investors are increasingly interested in working with international firms. “It is true that institutional investors here are still more likely to hire a local player but this is slowly changing,” he explains. “Issues like fees are still very important in Germany and local consultants tend to be cheaper than international houses.
“However, people should realise they get what they pay for. If investors are prepared to pay a lot for asset management, they should also be prepared to pay a fraction of that to consultants to make good strategic decisions. Often clients try to negotiate the lowest fees possible. It will take some time for them to realise that fees shouldn’t be the most important criteria when choosing a consultant.”
Consultants are convinced that the current situation in the insurance and pension business will keep them busy for the coming year. Says Crawford: “The insurance business is in turmoil and also the KAGs, which used to run everything themselves, are now outsourcing more and more. All these changes mean there will be an increasing demand for strategic advice and investors will be looking to us for help.”
Opportunities await in shift to DC
The downturn in markets has left many of Ireland’s defined benefit schemes underfunded and raised the need for changing fund structures and investment strategies. Seven in 10 schemes remain defined benefit but the move towards DC is accelerating and this transition is helping consultants increase their presence among institutional investors.
Whether pension funds are executing ALM studies, considering a move to a defined contribution system or changing their approach to investments, the help of consultants is now crucial.
Joe Byrne, at consultant Coyle Hamilton, says: “The slowdown in the economy has meant that there haven’t been many start-ups in the last couple of years, but we are still getting a lot of work from clients both local pension funds and multinational companies based in Ireland.”
Byrne explains that the services that clients are demanding most are those related to actuarial studies, investment consulting, implementation of new strategies and communication. “Some of the domestic players are too small to use some of the most sophisticated services we provide but multinational companies are demanding them.”
He believes 2003 will be a good year for the consultancy business as a whole, although he doesn’t predict any important changes in terms of market share. “At the moment we have around 10% of the market, and we haven’t seen many changes in market share. Some clients do move from one consultancy firm to another, but these moves are quite limited,” he adds.
The largest player in the market is Mercer. Tom Murphy, head of Mercer Investment Consulting in Dublin, admits the Irish market is small but he believes it is set for growth. The introduction of the accounting standard FRS17 and the move towards annual solvency tests is forcing pension funds to reconsider their strategies. “These changes are making pension boards more aware of the risks involved in equity investments,” says Murphy.
Murphy believes that this need for strategic changes is driving growth in the industry. “Clients are reviewing their approach to investment and there is a clear move towards specialist asset management. Also, all the news related to the national pension reserve fund has attracted a lot of interest from pension funds in Ireland. They see what the fund is doing in terms of investment and come to us wondering if they can follow the same route or adapt that model to manage their own assets.”
Still keeping it personal
Italy’s consultancy market remains relatively small and institutional investors are still reluctant to pay for advisory services provided by independent firms. Small domestic consultancy firms still prevail over their larger, better-known international counterparts.
In a country where personal relations are crucial, the best-known Italian consultants are always on the preferred lists of institutional clients. Although investment consulting is an area with great potential for growth, at present actuarial, legal and administrative advice are the most common services sought.
Although a significant number of new pension funds have been authorised in the last couple of years, the impact that this is having on the consultancy industry is surprisingly limited, since these new funds tend to be too small to justify the expense of hiring a consultant.
Those in the industry say this is unlikely to change in the near future. Piero Marchettini, managing partner at Adelaide Consulting in Milan, says the prospects for the Italian pension market are more uncertain now than when Silvio Berlusconi came into power in June 2001. Managers, consultants and others in the industry then hung high hopes on the government’s pledge to boost second pillar pensions, only to be let down when reform failed to materialise.
Today, as has been the case for the last two years, the transfer of the TFR – the severance pay system for Italian employees – into pension funds, is still seen potentially as one of the main drivers for the future of the pension industry.
For Marchettini this transfer not only depends on putting together a legal framework to regulate the move, but more on the fact that both employers and employees need to be willing to accept the change. Both the reform of the labour market and the instability in the financial markets means that an agreement between the parties involved is unlikely to be achieved in the near future.
At Hewitt Associates in Milan, director Guido Blasco comments: “We don’t know when and how the TFR is going to be transferred but the big question is who is going to manage it – whether it is going to be the market itself or the nation-wide pension funds.”
However, the institutional market is more than ready for the newly created pension funds and the assets that the TFR transfer could bring into the industry. Corporations, banking foundations and old pension funds have been using consultants for a long time and they will continue doing so.
Moving into pan-European future
Luxembourg’s consulting industry is split into two factions – those working with Luxembourg-based international clients and the local pension funds operating within the country. On the domestic market, interest in pensions has been growing significantly since new legislation in 1999 that changed the structure of pension provision and taxation.
James Ball, managing director at JBI Deloitte in Luxembourg, says the fact that local companies are moving from book reserve schemes into segregated occupational pension plans has produced a lot of work for consultants.
With international clients, however, business has been slow in meeting expectations. JBI has been helping international companies set up pension funds in Luxembourg that can be used on an international basis when the European pensions directive permits.
Ball adds: “The fact that there has been a political agreement on the directive means that the interest in pan-European pensions is at last growing. Employers see that after years of discussions the idea of pan-European pensions is now real and that if they need to make a move on pensions they should take into account what is coming along in Europe.”
Luxembourg’s potential metamorphosis into the centre for European cross-border pension has led asset managers and consultants to set up local offices in recent years.
Some have lost faith at the lack of progress and have closed offices, others have chosen to continue covering the region at arm’s length. Barnett Waddingham, for example, has closed its Luxembourg office and is serving existing clients from the UK office.
For some, however, local presence is essential. “There is definitely a market for consultants in Luxembourg, but you have to be very close to it,” says John Heymans at Watson Wyatt in Brussels.
“You either need to be a Luxembourg national or have people there that know the market very well. The market is starting to develop and it will take a while before they decide they need to look for advice, but you need to be there now.”
Although actuarial and tax-related work is the staple for consultants in Luxembourg, demand for investment consulting is growing and likely to be a significant source of work. Says Ball: “Understanding cross-border asset allocation is crucial and even though to date this is a very small area of the services we provide in the near future we expect to be a very important topic.”
Regulator stokes up demand
Legislative changes have made it a productive year for consultants in the Netherlands. A deeply unpopular clampdown by the pension regulator as well as increased disclosure, enforced by the Dutch Association of Industry-wide pension funds, have pushed the country’s pension funds closer to consultants.
Changes, introduced by the regulator Pensioen & Verzekeringskamer (PVK) at the end of last year, stipulated that the third of Dutch funds with coverage levels below 100% had a year to rectify the situation.
It has also increased mandatory coverage to 105% and tightened up on the size of buffer funds schemes – funds are now required to have a sufficiently large buffer to cover a 40% drop from the highest valuation their equity holdings have reached in the past two years.
Frans Dooren, head of investment consulting at AON in Rotterdam, says the changes are producing a huge demand for ALM studies. He says many funds have came for advice after their coverage ratio fell below 100%. In addition, many have asked for an ALM analysis to ascertain the amount of funds the plan sponsors need to put into the fund to make up the shortfall.
But for Frans Ballendux, director at Mercer Human Resource Consulting, falling markets and funding issues have had another effect. “Everyone who looks at the Dutch market says ‘you must be getting business on the back of funding issues’. But I don’t really see it this way. What I see is that investment expertise has just become more underscored in this market.”
As with many other European countries, the issue of performance measurement continues to grow in importance. “In light of Z scores performance measurement is becoming more important,” says Dooren. And although the Z score system was introduced three years ago, consultants report a significant amount of business helping pension funds with them.
“As for the move to defined contribution, I think this is a trend that will continue. In the Netherlands we have a lot of final pay pension plans, we see a shift from final pay to career average,” he says.
The large international consultants Mercers and Watson Wyatt continue to dominate the market. Last August the Dutch arm of Buck Heissmann announced a merger with the Houten-based actuarial consultants ConAct in a deal that doubled Buck Heissmann’s workforce to around 20. Buck Heissmann plans to double in size in the next few years although it has no plans to offer investment advice.
International consultants Hewitt Associates cemented a 15-year relationaship with its Dutch-based partner Heijnis en Koelman and created a wholly-owned Hewitt operation, Hewitt Heijnis en Koelman.
Do-it-yourself attitudes still prevail
Pension funds in the Nordic region still vary enormously in their attitudes towards the use of consultants. Following the events of 11 September and the subsequent slump in equity markets, a number of funds became technically insolvent and trustees became interested in risk control, resulting in a flurry of ALM studies.
On the investment consulting side, however, consultants are still struggling to get pension funds to sign up. “Denmark still has a real ‘do-it-yourself’ attitude. Consultants have not been that widespread for the long and we still have to prove that we have an edge over institutional investors. It’s still very tough on the investment consulting side,” says Jasper Kirstein of Kirstein Finans in Copenhagen.
One area providing business to consultants is the unit-link market. “Despite, or perhaps even because of the drop in equity markets, the unit link market is becoming an area of increased focus,” says Kirstein.
In Denmark Willis already supplies unit linked products in conjunction with ABN Amro and consultants are believed to be cosying up to insurance companies in a bid to offer fund research for their unit-linked products. Both Mercers and Aon, big players in the fund selection business, are believed to be in the process of trying to secure a relationship with a unit link provider.
In Norway, the prospects for investment consultants remain bleak. Wassum, one of the most successful consultants in the Nordic region, opened a branch in Oslo a couple of years ago but funds are still reluctant to employ consultants. “Investment consulting in Norway is still as good as non-existent,” says one consultant based in the region.
Norwegian funds have traditionally invested conservatively and many funds have cut back to holding just 10% in equities. Caspar Holter at Pensjon & Finans says the market has been flat. “Funds are reluctant to do anything at the moment, they are not asking for help from anyone, but they are in an awkward situation.
“In the next year, pension funds will be forced to do something, they will have to report and everybody will have to explain the risks they are taking. I think 2003 will be a good year for consultants.”
In Sweden, the large international consultants continue to dominate the market along with home-grown Wassum. Jan Bernhard Waage, Wassum’s managing director in Stockholm believes this year is likely to be busy with ALM studies and monitoring managers providing most of the work.
Wassum’s co-operative agreement with Hewitt, signed a couple of years ago is likely to add weight to its challenges to the larger consultants. At the beginning of last year, the Swedish ministry of finance asked the both of them to evaluate the efficiency of the state run AP funds’ restructuring programme from six to four funds.
One other interesting development last year was the decision by Swedish consultant Bohman & Lindstrom last May to branch out from straightforward advisory work into providing investment advice. Towards the end of last year it signed its first client, the Swedish church insurance association, for which it is managing a e490m mandate.
Uphill struggle for new accounts
Portugal’s pension fund market is at a standstill – disappointing investment returns have made investors question the benefits of pension funds compared to insurance contracts and the poor state of the economy has led many companies to cut their employment benefit policies.
This means that the creation of new pension funds is on hold; a situation that is unlikely to change in the near future. Consultants are consequently facing an uphill struggle when it comes to securing new accounts.
However, for existing pension funds the use of consultants is becoming more common. Investors are more focused on risk and specific benchmarks, the demand for asset-liability studies has increased considerably and performance measurement is something that everyone is taking about.
“Investment returns is something that is keeping pension sponsors worried,” says Rui Guerra, senior consultant at Mercer in Lisbon. “They want to know whether their pension funds can take the level of risk they are taking at present and they come to us asking for help in finding benchmarks that are suitable to them.
“The negative returns are not something that affects the pension funds and their members. It’s affecting the sponsoring companies as a whole and that’s is one of the reasons why they really want to rethink their investment objectives and strategies.”
Watson Wyatt and Mercers continue to dominate the market and have seen their business grow despite the slow development of pensions. Says Guerra: “We have seen more development in terms of greater sophistication in the sponsoring companies rather than a real growth in terms of new pension funds in the market.
“We are seeing more demand for performance monitoring and manager searches, but I think everything related to investment strategies is what people are more interested in at the moment.”
At Watson Wyatt in Lisbon, consultant Carlos Ravara says demand for manager searches has dropped off significantly during the last year. “There are other services that are a lot more in demand at the moment,” he says. “We are working a lot on ALM studies, and in this field we are doing something which is new in the market conducting ALMs for defined contribution plans.”
He adds: “Sponsors of DC plans also want to know the risk they are taking even though they don’t have liabilities as such. But they do have the risk of not achieving the expected pension provision in the future, so this is an area we are working on at present.”
Transition brings flurry of new work
Last November marked the deadline for Spanish companies to externalise their pension commitments through a pension fund or an insurance vehicle. This deadline has meant a flurry of work for consultants in helping funds make the transition.
“Last year there was a lot of activity for pension consultants especially because of the November deadline,” says Manuel Peraita, director at Madrid-based consultancy firm Peraita & Asociados. Now the externalisation is more or less over, consultants, especially those in the actuarial field, report a lull in business.
“During the last few years we have witnessed a move from defined benefit plans to defined contribution, and the role that consultants can do for this plans is quite limited,” he says. “In the medium term the demand will grow again because in many cases the structures that have been put in place will not be sufficient to provide an adequate pension.
Consultancy firms in Spain are focusing on other activities that are attracting more interest from clients. First it was compensation, then human resources and, more recently, investment consulting although this remains in its infancy.
The reason behind this reassessment is the structure of the market itself. Large financial institutions and saving banks dominate and dictate investment strategies to the plans, leaving consultants to offer little more than performance monitoring services
Constantine Gomez at Mercer Investment consulting in Madrid says that consultants still play a vital role in choosing a gestora and that this need for professional and independent advice means some funds now appreciate they have to pay for these services.
Diego Valero, managing director of Madrid-based Novaster, says: “Pension funds have to realise that they can actually save money by hiring consultants that can provide them with good investment advice.
“This is a new concept for many investors that traditionally have received advice from financial institutions, but their mentality is slowly changing. Depending on the size of the pension fund, consultants can be more or less expensive, but it is worth spending money if they provide added value.”
For the coming year consultants expect the demand for services other than actuarial to grow. “We would like to focus more on investment consulting because we think it is an area that will be increasingly important in the future,” says Valero.
Myners stokes demand for services
The Myners report, despite being published almost two years ago, continues as a steady stream of work for consultants, predominantly in educating trustees.
Paul Black, head of investment consulting at Buck Investment Consulting, says there is great demand from trustees and sponsors to familiarise themselves and get up to speed with the Myners requirements.
Consultants have therefore running training courses for trustees. Black says that as trustees become more familiar with the basics of the Myners report, so they are giving closer scrutiny to other issues such as the minimum funding requirement, falling equity markets and the importance of a solid investment strategy.
Black maintains that Myners’ recommendations are likely to be a source of work for at least another year. “To implement all the recommendations is going to take a long time,” he says.
The closure of final salary schemes continued unabated last year. Consultants report this as a source of work in the short run but concede that defined contribution schemes will require less maintenance in the long run.
As for the balance between active and passive management, most consultants report an equilibrium and no discernable trend in either direction. Once again with alternative investments, consultants say funds remain interested but non-committal.
Another important development was the decision last summer by the consultant Towers Perrin to close its fund manager research operations after it agreed to promote Frank Russell’s multi management product to UK pension funds.
Towers said it chose to link up with Russell due to a loss of faith in the investment consultancy model; an argument ridiculed and dismissed by others. At the time of the announcement both Mercers and Watson Wyatt said they had no intention of winding up their investment manager research and selection.
And 2002 saw the formalisation of a three-year-old collaboration between the UK-based actuaries Bacon & Woodrow and the US benefit consultancy Hewitt Associates.
“The agreement was that Hewitt would back the development of investment consultancy on a global basis,” says Nick Fitzpatrick, the man responsible for building up the investment practice from London.