Given that Europe’s capital markets have had their roughest ride for almost 30 years, it’s little surprise that pension funds are reviewing investment strategies and showing an increased interest in performance measurement and risk analysis.
Underfunded pension schemes are now common across Europe, and many have had to consider changing fund structures and their approach to investment. Poor performance has also made many funds more willing to pay for professional investment advice.
John Heymans of Watson Wyatt in Brussels says pension fund boards have to provide statements of investment principles and therefore require ALM studies to support them. “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 on,” he says.
In Belgium, as across Europe, there is a clear trend towards formalising investment strategies and this is why the role of the consultant is becoming more important.
Consultants have been extremely busy in those countries with changing pensions legislation or regulations. In the Netherlands, for example, a tightening up of coverage ratios and increased buffer fund limits has seen funds running to consultants.
The 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.
The PVK has also increased mandatory coverage levels to 105% and tightened up the buffer funds that Dutch schemes are required to hold- 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 last two years.
Consultants in the Netherlands report a surge in demand for ALM studies, the purpose of which being twofold- to ascertain coverage levels precisely and to establish what, if any amount needs to be reintroduced into the fund.
Reform to 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. A lot of consultancy work continues to be run along existing banking relationships although consultants say investors are increasingly looking to professionals outside financial institutions and, more importantly, are prepared to pay for it.
Hartmut Leser, managing director of Bad Homburg-based 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.
In the UK the Myners report, released almost two years ago, continues to provide consultants with work, predominantly in educating trustees who are keen to familiarise themselves and get up to speed with the Myners requirements.
Consultants have therefore been running training courses for trustees and sponsors, courses that have led up other avenues including the minimum funding requirement and the importance of a solid investment strategy.
In many countries, the well-documented switch from defined benefit (DB) to defined contribution (DC) pension arrangements has been a source of work. Consultants in Ireland and the UK report that they are busy helping with the transition. In the long run, however, the overall workload is likely to fall due to DC schemes requiring lower maintenance.
Ireland remains a relatively small market for consultants although new legislation is likely to expand demand for consulting services. Tom Murphy, head of Mercer Investment Consulting in Dublin says the introduction of the accounting standard FRS17 and a move towards annual solvency tests is making funds reconsider their strategies.
“These changes are making pension boards more aware of the risks involved in equity investments. Clients are reviewing their approach to investment and there is a clear move towards specialist asset management,” he says.
In Spain, consultants have been busy throughout last year helping companies meet last November’s deadline for externalising their pension commitments through a pension fund or an insurance vehicle. For many schemes, employing a consultant has been a first and is indicative or a gradual change in attitude.
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.”
Some of the other European countries remain steadfastly cautious towards consultants. In Norway, low average equity holdings by pension funds mean meagre scraps for consultants. “Investment consulting in Norway is as good as non-existent,” is one local consultant’s blunt assessment of the industry.
Prospects remain pretty bleak in Italy where the pensions industry has been badly let down by the Berlusconi government. Two years ago one election promise was to boost second pillar pensions, a pledge that lasted marginally longer than the election campaign.
Piero Marchettini, managing partner at Adelaide Consulting in Milan, says the prospects for the Italian market are more uncertain that they were when Berlusconi came to power. There is, however, a glimmer of hope as assets from the country’s TFR, or severance pay system, are transferred into pension funds.
Consultants report that much the same is happening in Austria where a lot of the work has been associated with reform of the country’s severance pay system into new employee welfare funds, the Mitarbeitervorsorgekassen (MV-Kassen).
Nine different providers have been authorised to manage MV-Kassen and consultants have fielded numerous enquiries about how to make the move and which providers they should choose. Although consultants are ready to advise, few companies have made the leap into the new funds. Paul Roettig, general manager at Hewitt Associates in Vienna, says consultants are in a strong position once companies choose to embrace the new structure.
Many of the individual country reports show consultants believe the investment advisory side is likely to become a growth area, even in countries such as France where the consulting industry remains immature.
Nick Fitzpatrick, global head of investment consultancy at Hewitt Bacon & Woodrow, says: “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.”
Frans Dooren, head of investment consulting at AON in the Netherlands, may as well be referring to the rest of Europe with his analysis of the Dutch market. “There’s more legislation and supervisors are paying more attention to pension funds. During falling markets, funds feel more comfortable when they use a consultant. With stock markets rising in the past, many simply didn’t feel the need for advice.”