UK – Pension consulting firm Watson Wyatt has criticised investment banks for bombarding its clients with unnecessary products.

“Our clients are being bombarded with products,” said senior investment consulting Nick Horsfall. “Most of which are designed to make money for investment banks.”

One senior pensions figure at an investment bank said: “We’d agree with their sentiment on that.” But the person suggested that investment banks are more creative than consultants, with more “cutting edge” experience. And the person added that among consultants there was a “not-invented-here” syndrome.

Watson's comments come as investment banks are increasingly moving into the pension market by offering new products such as derivatives as schemes seek to overcome shortfalls and match liabilities.

Watson said less useful derivatives included exotic payoffs, cash guarantees, highly structured credit and single stock options. But interest rate swaps, inflation swaps, equity options and credit default swaps were useful.

Horsfall was speaking at a briefing where he and colleagues identified a “governance gap” in UK pension schemes – whereby trustees do not have the expertise to deal with the issues facing them. They saw a gulf between the pension sponsor and trustees – with the actuary often in the middle.

“Better decision-making needs better people,” said Chris Ford, head of investment strategy. He said schemes are now “governance challenged”.

Horsfall told the briefing that the current vogue for liability driven investing was not a panacea, although the idea that it could solve all problems was “rubbish”. He added: “I don’t think it’s flavour of the month.”

Many Watson clients were talking about LDI and a lot would institute it, he said. “I’d be extremely disappointed of my clients stopped talking about it.”

Before instituting LDI, schemes had several issues to address first, he said. These included funding level, asset allocation and scheme maturity.

And the firm said that trustees should become more “commercial” in how they look at sponsor risk, and that sponsors should provide an annual “analyst-like” presentation to trustees.