It is estimated that up to 90% of a quoted service company’s market capitalisation is due to its reputation. But this reputation can take a knock from clients and investors if people think there are conflicts of interest in the service provided and firms are no longer perceived as independent. This is equally true for pension consultants, whose practitioners admit conflicts of interest exist in their industry but differ on the best way to manage them in their clients’ best interests and how serious the issues are.
In a post-Enron/Arthur Andersen world firms are keen to portray a whiter-than-white image, although the range of conflict of interest issues facing pension consultants is lengthy: ownership by financial services groups, such as insurers or banks; advising both scheme sponsors and trustees; maintaining actuarial and accountancy arms in one firm after the US Sarbanes-Oxley Act; providing actuarial and consultancy services to a pension fund after the UK’s Myners report; forming or advising a manager of managers arm; having a fund management arm within the company given the evident failure of Chinese walls in investment banking; and advising fund managers on how to market their wares to pension consultants!
Ownership is seen as a potential source of conflicting interests. UK firm Hymans Robertson, which is a partnership linked by affiliation to a European network of other firms, Millinan Global, where one of the criteria of membership is independence of ownership, summed up the issue for those non-affiliated with larger financial services groups. Keith Faulkner, head of the investment consulting practice at Hymans, says: “Being owned by a bank or insurer is a conflict of interest.
“The consultants lose independence and the parent can exert influence on the firm. We stress our independence and companies are more aware now about the issue than one or two years ago.”
Nordic consultants Wassum carried out a management buy-out from Skandia, a Swedish insurer, for this reason of independence from potential conflicts of interest. Jan Berhard Waage, managing director of Wassum in Stockholm, says insurers or bank owned none of the local players due to the suspicion of non-transparent kickbacks.
Tim Reay, international benefits actuary at Hewitt Bacon & Woodrow, says in continental Europe consulting firms were often an offshoot of insurance and brokers, especially in France. “We do not like insured solutions as there are potential conflicts but it can be an efficient for small schemes.”
David Fairs, a partner in the people services practice at KPMG, agrees packaged solutions were more common on the Continent than in the UK. The UK has largely separated functions from insurance; to perhaps doing the administration internally and then outsourcing to whichever firm is best in the different areas. The reasons for this varied in the countries depending on their pensions history, he adds.
In Belgium and the Netherlands, for example, commission is paid on a bundled service, which reflects their culture and size of companies, Fairs says.
And Faulkner at Hymans Robertson questions how much of a problem commission payments were. “Pension consultants part paid by commission in itself is not a problem as it can be offset against fees; ownership by insurers is a serious problem, however.”
But firms insist there are potential advantages in being part of a larger company. Paul Black, head of investment consulting at Mellon Human Resources and Investment Solutions (in the UK formerly called Buck), says it was an advantage for the firm to have a parent with deeper pockets.
Andrew Kirton, head of the UK practice at Mercer Investment Consulting, which is owned by US giant Marsh & McLennan Companies, in addition says there could be cross-selling opportunities. “We can work in multi-geographies and multi-service. There can be synergies for clients to exploit as we are the insurance and risk management.”
He adds that conflicts have to be managed, however. “We manage conflicts by being open – no client has to come to us – and by acting in an adult way in following regulators’ rules. MMC owns a large employee benefits consultancy and a very large investment manager.
“Our transparent research process to any investment manager is applied evenly to Putnam [a US fund manager owned by_Marsh] with not one jot of difference.
“Clients are aware Putnam is part of the same group and why they would be in a shortlist; then it is up to them to take a view.” He says the aim was for a level playing field when proposing short-lists of fund managers to manage pension fund assets, although a few years earlier it had been tilted against Putnam.
Mellon’s pension consultants took a different tack in putting its firm’s fund managers, such as Newton, forward. Black says there were potential pitfalls and conflicts to manage. “In the UK we treat Newton the same way in researching and ranking products. But in practice we do not put Newton forward as often as we could, for example, if five groups can do the job and we are recommending three it is easy not to include Newton.”
He denied rival firms’ comments that Mellon had expanded into pension consultancy as a way of cross-selling. “Mellon bought Buck as it wanted to diversify earnings and consultancy is less cyclical than fund management; not to cross-sell. We do not advise fund managers on pension consultants, for example, and Chinese walls means Newton is not privy to information from our pension consultants, or vice versa, before the wider world is told.”
And Mellon has come out against the related area of managing fund managers. “Multi-manager arms have inherent conflicts of interest; we do not do this at the moment as we have thought about it and are against it at this stage.”

Most firms supported this view. Hartmut Leser, managing partner at German-based Feri Institutional Management, says: “Our multi-manager arm is not for institutional business as it is a conflict of interest to have an asset manager selector push their own multi-manager. People would not believe the results.”
But Hymans Robertson’s Faulkner says: “Although I have concerns with funds of funds I personally do not really see it as conflict of interest. It is a question of degree but others are suspicious. But with fund manager investigations on market timing and late trading happening by consultants on firms in the same group it could possibly lead to abuses – would they tell clients if they found anything?”
Kirton at Mercers says it had investigated Putnam on the latest financial scandal involving late trading and market timing. “We cannot say what it has done to ratings but great pains have been made to make the process thorough and fair for the best interests of clients. The scandal has led to issues of trust, and fund managers leaving groups affecting the product but no institutional money has been lost directly.”
On multi-managers, Kirton says as multi-managers were organisations that bundle investment managers into diversified specialist funds, often for smaller pension funds, consultants had the same skill set. Kirton says: “It falls between fund management and pension consultancy. We could say we would not help but we believe our own research process is the best in the world.”
He also believes that Mercer’s Chinese walls were strong enough to prevent conflicts of interest when a separate unit in the firm advises fund managers on how to market their wares to pension consultants.
On the actuarial side, concerns have also been raised. The Paul Myners review of institutional fund management had recommended the separation of consulting from actuarial work for trustees, not because of any conflict of interest but if it offered best value.
Adrian Mathias, an actuarial partner at Watson Wyatt, says 99% of conflicts when advising pension fund trustees and their sponsoring employers were managed constructively and only 1% took separate advice.
He says these potential conflicts were exacerbated when a scheme was underfunded but UK trustees had increased powers from June that if the pension scheme was wound up the sponsoring company would meet all costs of buying out the benefits in the market.
Peter van Solinge, managing director at Aon Consulting in the Netherlands, says conflicts could arise between actuaries and accountants consulting and certificating financial results for the same firm – which is now banned in the US.
But Fairs at KPMG says that to try and legislate against conflicts of interest in all cases is a potential additional level of bureaucracy when trustees and pension schemes are already struggling and would not eradicate all conflicts.
And although there are wide differences between firms’ operation and stance on independence in a competitive market as long as potential conflicts are transparent then it is up to those trustees and scheme sponsors paying the money to decide how important an issue it is and thereby control firms’ market values.