The devil's in the detail
In Spain, pension consultants are spending their time advising clients on corporate governance issues and other obligations in the wake of various new regulations. For the time being, investment issues have taken a backseat, even though the externalisation process has meant a huge increase in the number of pension funds in the country.
Demand for consultancy services is coming mainly from the corporate governance side, says Guillermo Esturra, senior actuary at Watson Wyatt. Companies in Spain are looking to extend their corporate governance guidelines to their employee benefits programmes, he says, and they are seeking advice on this.
“It is a legal requirement, but also a market tendency,” he says. “They want not only to do things properly, but to show to the market that they are doing business properly.” Mercer says there is strong growth in its pensions consultancy business. It is up around 11% from last year, says Lazaro Villada, managing director of Mercer Human Resource Consulting in Madrid.
The number of pension funds in Spain has increased dramatically over the last few years, rising by about 81% from 1997 to 2003 according to data from Hewitt Associates. This has been boosted by the Spanish pension law, which since November 2002 has prohibited the use of book reserves for pensions. Now, all employer-sponsored pension arrangements have to be funded either as a separate pension fund or via an insurance contract.
The externalisation process, which saw many companies transferring reserves into separate pension funds, has swept across Spain. Administering these new pension funds is now important because of the large amount of money in them, says Jose Maria Sanmartin, senior consultant at Aon Consulting in Madrid. Villada says that most of the externalisation business was one-off, with pensions commitments transformed into either qualified pension plans or insurance contracts.
“Most of them are not requiring a lot of maintenance because mostly they are defined contribution.”
Sanmartin says although the most important part of the externalisation process happened in 2002, the government has set a deadline of 10 years for all companies to complete the change from book reserve arrangements to externally funded pension plans.
It is the increase in legislation surrounding pensions and investment management in Spain, says Villada, which is sparking more demand for consultancy services at the moment. The new feature in the pensions landscape in Spain is the increasing amount of detail required from pensions administrators, such as the statement of investment principles, he says.
This year’s new pensions legislation makes it compulsory for defined benefit pension schemes to list plan liabilities and assets every three years, and have a report from an independent actuary. Some of Spain’s pension funds have already made a change from defined benefit to defined contribution.
There is a feeling in Spain that at some point in the future, there government will move to cut the level of social security pension provision. At the moment it is so generous that there is only limited incentive for private pension provision. But there may come a point when there will be more employee pressure for corporate or industry pensions.
Clients are also in the throes of switching to international accounting standards. Companies in Spain are, in general, a little late in getting to grips with the IAS19 issue.
Direct investment issues are taking a back seat for pensions clients. “Unfortunately, client demand is very much related to compliance with legislation,” says Esturra. “It’s a reactive approach for our services.” Trustees at pension funds are preoccupied with meeting legal requirements. They are more worried about their personal responsibility than to maximise the return of the fund.
In the Spanish market, Aon, Mercer and Watson Wyatt are the main players amid other international consultancies. The smaller local firms are winning business by charging lower fees.
However, the major trade unions in Spain are launching their own consultancy operation to sell investment, accounting and actuarial services to the trustees of pension plans. The unions, says Esturra, have a majority position by law in many of the committees controlling the plans, which means that the consultancy operation is playing with a political advantage.
Next year, consultants in the pensions sector will have their attention focused on three main issues – IAS19, corporate governance and investment, says Esturra. Within investment, consultants will be called upon for multi-management services. The new law provides for the possibility of multi-management for pension funds, he says, and over the next few years, pension funds are likely to take this route.