The growth in outsourcing investment management and administration activities among European pension funds is linked to national circumstances but also, and most importantly, to the size of the pension funds. In general, the trend among small pension funds across Europe is to outsource more and more,both administration and investment activities. The large ones, especially those which have been running for a long time, still keep their administration in-house, but they are showing greater interest in going external regarding investments.
In some countries such us Switzerland, with a very mature pension fund industry, the trend towards outsourcing has increased, although further growth is not expected in the short term. “There’s been a significant growth in investment management outsourcing for the last few years, but I don’t think that this trend is going to continue,” says Giocacchino Puglia, senior investment consultant at Watson Wyatt in Zurich. “Historically in Switzerland pension funds have always done a lot internally and half of the assets are still managed this way.” During the last few years many large Swiss pension funds have started outsourcing their investment activities, but the ones which have not done so are not necessarily thinking of following this approach. “ But I so see a continuous growth of outsourcing among the smaller pension funds, because it does not make much sense for them to invest resources in managing their assets internally,” says Puglia.
Consultants based in Switzerland have been seeing the demand for investment services advising increase significantly. “The more pension funds go external the more need the use of consultants,” Puglia says. “Selecting asset management providers is a typical consultant’s function, but even when they do manage things internally they also need our advise to make sure that what they are doing is right.”
In terms of administration , most of the large funds in Switzerland are managed internally. “I don’t see a trend towards going external regarding administration activities,” says Puglia. “When you are administered internally and things go well there is no need to go elsewhere. For the small pension funds the situation is different and most of them are already externally managed.”
One of the reasons for not taking outsourcing arrangements is the costs issue, although there is a certain recognition in the Swiss market that you shouldn’t do things internally just because you don’t want to pay the cost of going external. “If pension funds decide to do their investment management and administration internally they should make sure they have the same capabilities of the external providers,” he says. “A medium size pension fund that typically hires one internal manager, sometimes on a part-time basis, can’t really claim that it can obtain the same results than if it had their assets managed externally.” In this cases the only reason for these pension funds to remain internally managed is exclusively based in cost savings.
“In general I would say that the trend to outsource activities among Swiss pension funds will not stop, but it will not be as strong as it has been in recent years,” Puglia says.
The costs issue is also relevant in Germany, where administration is very cheap as long as it is inside the company. “In many cases outsourcing means having to pay too much money,” says Klaus Heubeck, consultant actuary at Buro Dr Heubeck in Cologne. “People in Germany talk about the growth in outsourcing very much, but in reality I think it’s a very poor and slow development,” he says. On the other hand, the book-reserve system, where pension fund liabilities are funded internally, still dominates the market. “But there is a trend among the larger pension funds to outside funding, and among the smaller ones as well which have also the possibility of, for instance, using insurance contracts,” Heubeck adds. He does not expect a significant growth in the area in the short term. “Everything goes step by step,” he says. “At the moment we have a department focused on outsourcing and we are happy with that development, but so far we don’t want to force it any further because it’s very difficult recruiting the right people.”
In the Netherlands, tendency towards outsourcing seems to be positive on both the administration and the investment side. “It really depends on the size of the fund,” says Lou ten Cate, managing director at Amsterdam-based Investment Management Factory. “On the one hand the large funds are trying to acquire the small ones, and on the other the small ones are also in the process of outsourcing as much as possible.” There are a lot discussions going on in the Dutch market about the possibility for some pensions funds to get together and share administration activities. BPB, the building workers pension fund, is already thinking about establishing an alliance with BPMT, the metal industry technicians scheme. “People do realise that sometimes small is beautiful but it will not work out in the future, because they can’t compete in costs neither attract the right people,” says ten Cate.
Ten Cate believes outsourcing is improving the investment returns and the quality of the administration for institutional clients.
In Belgium, an increasing number of pension funds are also outsourcing their investment management. “I haven’t seen important changes in the big accounts, but the small funds are outsourcing more and more,” says Paul Herbillom, account manager at Brussels-based consultancy firm Intégrale. He believes the fact that there are more consultancy firms in the market is also contributing to this growth, since the search for new businesses is bringing the outsourcing issue to discussion.
In smaller markets like the Irish, it can’t be said that the interest towards outsourcing investment management has increased since most pension funds have always outsourced their investment activities. “Traditionally in Ireland 99% of pension funds are outsourced and they always have been,” says Alan Broxson, director of the Irish Pension Trust in Dublin. “The reason for this is that pension funds in Ireland are very small, and outsourcing is the best way for them to operate,” he says. Big companies like Guinness Ireland, Aer Lingus or Cadbury have always administered their pension internally but outsourced the investment management. “Personally I don’t think these pension funds will outsource their administration activities. I don’t see any significant interest in Ireland for this type of outsourcing,’ he says.
The general opinion across Europe is that professionals do better than amateurs although costs and the lack of quality of some outsourcing providers is putting some pension funds off the idea of going more external.

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