The whole point of the pensions consultancy business is to help pension schemes do what they have to do in the best possible way. They are there to provide backing at all levels, from expert advice on arcane investment instruments to performing some of the day-to-day administrative chores a company’s HR department can’t cope with. But where, across their range of services, do the consultants across Europe feel that they add value for pension clients?
Bernard Thomas, senior consultant at Watson Wyatt in Lisbon, says advising a pension fund is a continuous process, and this is how the firm can add value. “We very much see pension plans as part of an ongoing cycle approach and we help our clients at various points during that cycle,” he says.
An important aspect of the work is to keep monitoring the environment, looking out for legislative changes and anything that might affect conditions for a pension fund. So when clients ask what they should be doing, the consultant is able to point out things that the pension fund might not have kept track of.
Conducting market surveys is part of this, and this gives consultants the level of up-to-date knowledge that enables them to make suggestions that might otherwise not have occurred to the fund’s trustees or manager.
Part of finding the right solution is asking the right questions. On the benefit design side, for example, Watson Wyatt is able to help its clients by asking them how they envisage the plan they want to set up, says Thomas. “We try to understand, from our clients, what their purpose is in having a pension plan in the first place. We try to see what they’re trying to do, and then see if that’s possible,” he says.
Clearly, he says, one of the factors behind whether a plan is designed well is affordability. The consultant is able to run through examples of different options to see what the cost of the whole plan would be. “We don’t say – you must do this – we say, if you do a, b, or c, then these are the likely outcomes.”
Frans Ballendux, director of Mercer Human Resource Consulting in the Netherlands, agrees that consultants add value for the client more in the entirety of their service than in any single specific task that they do.
“We’re seconding the investment committee in the totality of their responsibility,” he says. “It’s in the aggregate that you add value – it’s the overall support.”
One year one aspect might be important for a client, but a year later than particular issue could be less relevant. Clients gain from the consultant by taking on board their expert opinion and in the new ideas they are able to come up with, he says.
Paul Glavin, associate at Hewitt & Beckitt’s Cork office in Ireland, says his firm adds value to pension fund clients by providing a level of expertise that they don’t have in-house. “We take a lot of the day-to-day tasks out of the client’s in-house HR and finance departments,” he says.
Their expertise means these tasks can be done more efficiently when outsourced in this way. Investment consultancy and actuarial HR are all areas which employers are tending to outsource, he says, following the maxim – ‘stick to your knitting’ – stick with what you know.
There are real advantages for scheme members, too, when a consultant is made available to them, in that they are able to speak to staff who have intimate knowledge of the pension scheme.
Because of the size of the Irish economy, Glavin says the profile of clients tends to be smaller than the profile in the UK or the US, where it’s not uncommon to have companies with tens of thousands of employees. In Ireland, the companies that consultants deal with typically have staff levels of 500, 750 or 1,000.
“So the number of companies needing to outsource would be (proportionately) greater,” since these smaller companies are less likely to have in-house pensions departments, he says.
In Italy, if consultants want to add value for pension clients, they should help communicate to company staff the need to build up their private pension pot. Piero Marchettini, managing partner of Adelaide Consulting in Milan says: “The most important way a consultant can add value in the area of pensions in Italy, is to make the new generation of employees aware of the huge gap they will find in their overall pension when they retire.”
In the last 10 years in Italy, he says, there have been at least three major changes to the law governing social security, and a further reform is expected now, affecting both private pensions and social security.
“Consequently, it is extremely complicated for many people to figure out what kind of benefit they can expect on retirement,” he says. For employees up to the age of 45, most of the pension they receive will be social security, but the rest will be private. But it is crucial that they find out how much they will get from each.”
In the UK, actuarial consultants Lane Clark & Peacock have come up with an idea which should add value for pension schemes by giving their members a far better chance of getting a reasonable investment return. They have devised an alternative to the ‘lifestyle’ option – the default option for members of defined contribution schemes, which generally keeps them invested in equities until a few years before retirement.
Instead of the ‘lifestyle’ option, LCP advocates its new DCisive option, which uses automated investment techniques to lock in capital growth during times when markets perform well, thereby protecting the fund should conditions deteriorate later.
As well as this, the firm is also busy at the moment helping pension schemes deal as effectively as possible with their closed defined benefit schemes. In the UK, three quarters of DB schemes are now closed to new entrants, but it is important to administer them properly in the period before they are actually wound up.
“We’ve been good at creating tailored closed defined benefit schemes,” says Francis Fernandes, partner at LCP. “And we hold seminars on how you should understand the specific risks.” He also cites the LCP’s push to tell trustees that investment strategy and the actuarial side of a pension scheme must be tied together as another of the many ways that the consultancy adds value.
Gustaf Rentzhog, director of Carnegie Pension Consulting in Stockholm, says that apart from providing the services other firms provide, his firm has a unique position which allows it to add value for clients on the investment side.
Carnegie’s extensive IT resources allow it to do instant asset/liability assessments for its pension clients, and this means it can handle their risk in a more immediate way than most consultants can – providing pension funds with risk control. In the solutions it comes up with, Rentzhog says the firm combines not just theoretical answers, but real ones that work, with more advanced financial instruments than other firms use, such as swaps and credit default bonds.
“Because Carnegie is in the market as well, we can ask our structured finance department – what can we do? We can show the whole fund how they do something, and not just in a theoretical way, but actually at the market price.”
The immediacy of this makes it possible for the client to act in a way that is closer to the market and therefore more likely to work. Clients can create different floors for different asset blocks depending on the liability profiles. “It is more like outsourcing the risk management function,” he says.
No comments yet