Shifting the emphasis to the continent
A defining moment for Watsons, the UK’s oldest actuarial firm, and probably for international consultancy, was the alliance with the US-based Wyatt in 1995. “That was a big step in our history,” says Paul Thornton, the firm’s senior partner, based in Reigate. “Our end became Watson Wyatt Partners and in the US, they became Watson Wyatt & Company.”
For R Watsons & Son, started in the 1870s, it was certainly a giant step on to the global stage. As the pre-eminent UK actuarial consultancy, Watsons grew with the surge of pensions schemes formation in the 1960s, building up its investment, benefits and insurance consultancy practices.
Wyatt was also an actuarial firm, formed in 1946, with a similar focus on pensions, but it concentrated on human capital consulting rather than insurance or investment consulting. “In the past, investment consulting has been done by specialist firms in the US,” Thornton says.
The two firms merged because they felt they needed a strong partner for a worldwide presence. Wyatt had a base in the UK, but was far down the list of players. They accepted they were never going to reach the top of the league by organic growth, Thornton says. However, they had established offices in Asia, contintental Europe, Canada, Australia and South America. “Compared with Watsons, Wyatt was a world-wide group.”
Watsons had set up joint ventures in a number of countries, such as France, Germany, Spain, and had an operation in Switzerland. “We wanted to position ourselves more strongly, not just in Europe, but worldwide, since we advised a large proportion of the FTSE 100 companies.” Another attraction of the deal for Watsons was its desire to broaden its activities into the human capital area. “The two firms were a good fit,” he says.
The arrangement is an agreement between the two firms to work together rather than compete. “We took over Wyatt UK, comprising some 200 people, while we were 800 or so at the time. In return, Wyatt then became a partner and took a financial interest in us.”
There was an IPO of Watson Wyatt & Company in October 2000, when 25% of the US shares were floated and bought by an investment trust. The share price currently is around double that of the original float price.
The UK firm adopted limited partnership status at the beginning of May 2002, becoming Watson Wyatt LLP. Watson Wyatt LLP’s revenues are over £200m a year. “We have had year-on growth, with underlying growth of over 15%, which is good for a mature market like the UK. Our growth is in the amount of work we do for clients and not just winning new clients. Investment consulting is amoung the fastest growth areas and now accounts for 10% of the business. Other fast growth businesses are human capital, which provides 15% of revenues, and insurance consulting, which provides also provides 15%. Half of the business is on the actuarial/benefits side, with a further 10% provided by the pension administration business. The move to DC has helped pensions administration growth.”
Globally, the two operations work closely together, so at client level, it should appear fairly seamless, says Thornton. “With e-mail, we can put teams together easily and have them communicate freely.” The firms also collaborate on areas such as software development.
Thornton regards investment consultancy, however different it appears at local market level, as “inherently a global business, as nearly all portfolios have an international component, which is why we need the capability to advise on the US market and managers.”
In the European arena, the market opportunities differ with the stage of development of the pensions market. Italy is less active than the Netherlands and has a much smaller team as a result. “When it comes to human capital, for example, there is a relatively big team in Spain and in Italy, but smaller teams elsewhere,” he says. “We see a huge opportunity for consultants in Europe, with the markets in Germany, France and Italy relatively undeveloped,” he says. “Relative to GDP, there are four times as many actuaries in the UK as there are in Germany.”
The pension reform moves in different countries are also providing openings for consultancy firms. “In 10 year’s time, I expect the balance of the firm to be much more to activities on the continent than in the UK, which will continue to grow but not so fast.”
Currently, the firm’s share of the UK market continues to grow. “But life is getting more complicated. The risks for corporates running a final salary pension scheme are now more obvious.” People management is becoming more sophisticated, and employers realise they have to track the economic value that is created by how they manage people. “We believe there is a direct correlation here,” says Thornton. “But managements have to be convinced that consultants can add value in this area.
“Pensions related areas will remain the firm’s core business,” he says. “With the swing to DC, clients will require more advice. I see us becoming more involved in investment consulting and taking more responsibility for the outcome. Even before Myners, we had decided this was the direction to go.”
However, there is no intention of following Frank Russell down the multi-manager route, he says. “Fundamentally, we want to remain consultants, but be able to take responsibility for selection of structures and managers, while not acting as fund managers. We could, for example, create a structure where there is a choice of funds, and they can have us choose the manager for the fund, say a UK equity growth fund.”
So how far will this approach, termed ‘implemented consulting’, take them? “There will be degrees to which we will take responsibility for what the client wants, and this might go as far as asset allocation, or just to choice of managers of particular funds, or which funds to put in the family. But, we do not intend to invade the fund managers’ space and take them on as competition. We want to do something different from that and it is a question of how you define it.”
Thornton says the firm has been involved increasingly in a more structured approach to risk, looking at where pension funds are taking risks and how the portfolio is constructed. “With large funds it is possible to build complicated structures, comprising both active and passive elements, so it is very important for sponsors to know what levels of risk they are exposed to.”
Why was performance measurer CAPS, which was owned jointly with Mercer and Bacon & Woodrow, sold off? “We were doing all our consulting on the back of the basic CAPS data. But the company itself did not have an entrepreneurial sense of direction, as no one felt they owned enough to develop it commercially. It was a bit stuck, as it was not consulting, it was just cranking out numbers.” It was decided that it would be better to hive CAPS off into another non-consulting organisation while retaining access to the data. “We are now carrying on with it as before as our source of data.”
But more important, in his view, is the research Watson Wyatt does on managers, which is not just about the performance managers have achieved. “We put a lot of money into investigating the different fund managers and liaising with them, to know the people and the decision-making processes.”
The Myners review committee’s view that actuarial consulting and asset advice should be separated is misguided, he feels. “In the US this has developed separately, while in the UK the same consultant historically may have been advising on both. I think clients are clever enough to decide if they want us to do both services or just one.”
He adds: “Myners also did not think the consultancy market was a competitive one. That’s certainly not our experience.” In fact, why investment consulting is the small and undeveloped market could be down to it being “an unattractive market in fee level terms.”
Watson Wyatt wants to be in the top two or three firms in every market where it operates. Globally, the firm has 6,200 people in 87 offices in 31 countries, with a focus on where the large multinational groups operate. “There will be expansion in South America and eastern Europe. In China and India we are growing, though we are not active in Africa at the moment.”
However, Watson Wyatt has tended to grow organically rather than by acquisition. Over the next five years, Thornton expects to be judged on performance rather than size. “Our aim is steady profitable growth rather than being hell bent on being in 120 countries. Size is not a criterion of success, and we are not prepared to sacrifice profitability for faster growth.”