European pensions consultants are a hardy breed. They have to be very hardy indeed in some countries, so meagre are the pickings. But with massive changes scheduled for the pensions sector in many countries, the outlook looks highly encouraging both for the huge, ever-spreading international consultancies and small firms concentrating on local markets.

There is more pensions consultancy about than appears on the surface. In countries like the UK, Netherlands and Germany, consultants can be readily identified, but in others they shrink like violets within insurance advisers and brokers, management consultancies, accountancy practices, human resources advisers and investment specialists. Even legal firms can harbour pensions experts.

It is often a question of looking hard not at how consultants describe themselves, but at what they actually do. This is what our survey assesses.

The two most common strands are the actuarial and the insurance. The actuaries perhaps see themselves as the Platonic spirit of true consultancy that is one remove from the fleshy coils of insurance broking. The difference is not just the academic rigours of an actuarial training, but of the usual fee-based approach in contrast to the commission rewards in broking.

But nothing categoric can ever be said about the European market. Even international consultancies found that the only way into a number of Scandinavian markets is by becoming insurance brokers. They hope to evolve a fee-based approach as the market develops.

Then there is the question of professional independence. Insurance companies have spawned actuarial and pensions consultancies, sensing yawning gaps in the market for advice. Consulting actuaries in Ireland, the UK, Germany and Belgium, for example, have formed associations whose hallmark is the consultant’s independence. German actuaries’ professional body, the DAV, has formed a sub group for pensions specialists, the IVS. Its 300 or so members qualify by extra study and exams on employment law and fiscal topics.

Germany

Given the prevalence of the book-reserve system in Germany, it is not surprising that liability and provisioning work dominates what pension consultants do. Employers’ contributions to the Pensions Versicherungs-Verein, the nationwide insolvency guarantee association, must also be actuarially calculated each year. Other methods of providing pensions benefits, such as Pensionskassen, support funds and the professional arrangements set up by doctors and accountants require actuarial input, usually provided by the wide range of consultancies, both independent or operated by insurance companies.

But actuaries are also involved in a wide range of basically non-actuarial consulting work,” says Brigitte Hiegemann of Buro dr Huebeck in Cologne. She mentions plan design, pensions administration, compensation and remuneration issues.

At Frankfurt-based Sedgwick Consultants, managing director Dirk Popeilas says employers are increasingly outsourcing the administration of pensions payments. He notes, too, a growing role on the communications side. “We get involved in negotiations between unions and managements regarding pension schemes.”

But consultants see most potential for growth on the investment advisory side. At insurance broking group Jauch & Hubener, head of the international benefits practice Horst Ludwig believes German companies are under pressure from international investors over the book-reserve system. He sees the development of “asset funding”, the build-up of liquid internal reserves, often through special investment funds, as the first step in opening up investment consultancy. But all agree that the arrival of tax-efficient externally funded pensions schemes requires changes to the tax system and pensions law.

United Kingdom

The UK’s new Pensions Act, largely operational in April, has been called the consulting actuaries’ charter, as defined benefit (DB) pension schemes can barely twitch a muscle without their actuary’s say-so. But UK consultants are not sleeping that much easier. Employers, partly as a result of the increased legislative requirements, are abandoning new commitments to DB schemes and changing to defined contribution (DC), which requires less intensive servicing by expensive actuaries.

That said, there is a mountain of £550bn of mainly DB assets in the UK being serviced on both the asset and liability sides. The Pensions Act is ensuring substantial work for consultants, particularly in relation to the new minimum funding requirement and the statement of investment principles. That bonanza must be set against the background of the maturing DB schemes.

Also, consultants are becoming victims of their success, particularly on the investment side, where they have become the gateway that investment managers have to pass through to gain access to the trustees. Pension schemes have learned the tricks and now do their own beauty parades. Another trend has been the formation of smaller consultancies, often by personnel trained by the big names, and able to be keener on fees. Liability-side work is becoming more a commodity than a service and firms have increasingly to look for higher value consulting work and new markets - hence the interest in continental Europe and further afield. The employee benefit and total remuneration roles are being explored, particularly opportunities in flexible benefits programmes.

The DC trend, perhaps soon a revolution, is likely to benefit smaller consultants, which are finding a thriving market in using insurance company and other administrative services and arranging separate investment management.

Ireland

Irish consultancies face similar pressures to their UK counterparts, with virtually no new DB schemes, says Denis Ryan, president of the Irish Association of Consulting Actuaries. Despite the burgeoning economy, he sees limited scope for expansion of liability and investment advisory services and other non-actuarial work. Much new industry is in the high-tech field, which customarily uses DC, so work that formerly produced high fees could be squeezed. As in the UK, any DC trend will favour insurance-based and smaller consultancies.

France

As the French system lurches unsteadily towards changing the balance between private and state provision, advisers’ expectations are great. Actuarial consultant David Pettitt of the Sedgwick group in Paris reports that “the French private pensions market is not going to explode overnight, but there will be changes in the years ahead. What may develop is the asset side, which has been neglected.”

At the Obseratoire des Retraites, secretary general Arnauld d’Yvoire, says “we are not expecting a quick and sizeable development of funded plans”. The new moves are more likely to benefit insurance companies and maybe instititutions de prevoyance. The role for actuaries and pensions consultants is consequently muted. Funds either do the work themselves or use banks and insurance companies.

The bulk of employers’ supplementary provision, which comes on top of the extensive state-controlled provision, has come from insurance-related investment schemes, with advice direct from insurance companies and advisers. Insurance brokers, with an estimated 20% of the benefits market, have traditionally provided employee benefit advice. “Most French brokers seem to do without actuarial advice and actuaries,” adds Pettit.

At brokers Andre de Larrard in Paris, Olivier de Larrard says that the French system is inimicable to paying fees for independent advice. “I am not sure there will be a great market for advice here, so let’s not fantasise. Brokers can give free advice because they work on a percentage of the premium, so it’s cheaper to use a broker. Most clients prefer to pay a commission on results.”

Netherlands

The Dutch private pensions market is the second largest in Europe. Some 600 actuaries are mainly distributed across insurance companies and pensions funds, with some in the very active consultancies advising on pensions schemes and employee benefits.

The pressure on the state system means the Dutch government will be unburdening itself over the next four or five years. It wants to do this, according to Rob ten Wolde, of the association of industry-wide schemes, in favour of “lower labour costs and greater competition”.

Falco Valkenberg, manager with BV Actuarieel JAW Hammer in Rotterdam takes the view that private provision is becoming: “a very important part of the market, with higher and higher amounts being invested. In future there will be more and more scope for top-up private pension plans.” This is good news for advisers.

The investment committees of the bigger Dutch schemes are staffed by professionals and academics with financial backgrounds making it easy for them to do without external consultants. Investment managers are appointed by people who feel they know what they want and where they are going. But Valkenberg says the picture is changing as more outside investment managers arrive.

Belgium

The Belgian market is small compared with its Dutch neighbour, but its advisory sector is active and developed. A wide range of actuarial and pensions consultants are often associated with the larger insurance brokers. Many multinationals operate from Belgium so the big international consultancies have operations here, often with antennae trained on the European Commission.

But there is still potential for growth, as local employers appoint consultants for the first time and look for wider services. Mercer Henrijean has won clients for its sophisticated performance measuring service, having doubled the numbers of schemes participating to more than 60 over its 10 years. In the longer term, consultants expect more schemes to move from insured to self-administered arrangements. Investment expert Koen De Ryck of Brussels-based Pragma sees a growing role for consultants in selecting managers as schemes move from balanced to more specialist mandates.

Major consultancies such as Conac believe they have to push schemes beyond just looking at performance figures by interesting them in techniques such as asset-liability studies. Conac partner Paul De Smet says: “We are ‘selling’ the educational aspects to pensions funds to show that there is a link between the asset and liability sides and that they should look at both combined.”

Denmark

Advisers have not had it easy in Denmark, even though external funding of pension schemes is obligatory. Most schemes are direct between employers and providers, usually insurance companies.

Consulting actuaries are very few. Only a dozen or so are active, according to Ole Block of SB Aktuar-Radgivning in Copenhagen, “and we employ most of these!”. The distinctive Danish approach to providing pensions through individual accounts on a DC basis means independent actuarial work is not needed.

The most active area of pensions advice is among insurance brokers. Wm Mercer managing director Carsten Andersen reckons that pensions advice probably accounts for around 20% of the income of the major brokers active in the area. A problem is that employers believe they know enough to go direct to insurers. But there are signs of change. “A survey we undertake shows that there is a trend to independent advice, with 50% of employers using advisers compared with 20% some years ago.”

Employers are having to become more involved. They can no longer just hand the area over to the insurance companies’ guaranteed products and forget about it, he maintains.

Sweden

Sweden’s very structured and regulated pensions market has hampered the development of independent actuarial advice. The Swedish consultancy market is showing more life than at any time in its previous history as change begins to drip into a system that long hampered the emergence of independent pensions advice.

William Mercer arrived in Stockholm in 1988 and has developed as an insurance broker. Managing director Ola Larsen says: “About 50% of our income is still on a commission basis, but the fee work is increasing all the time.” The pensions work has mainly been dealing with supplementary schemes for executives, he says.

SPP Consulting was established by major pension insurer SPP in 1981 to provide services on a fee basis to employers not covered by their insurance contracts; it is linked to Hewitt Associates. “We do a lot of employee benefits work,” says Margerita Eurenius, but schemes for senior management, early retirement and redundancy issues are also handled.

But the new horizon up consultants is investment consulting made possible by allowing companies to move assets out of the book reserve system and set up independent schemes. “This provides a very interesting opportunity for asset managers and consultants,” says Peter Dahl of PFAB in Stockholm. Mercer’s Larsen agrees: “Things are looking good. Investment consulting is the new development and we think it will be big.”

Norway

In contrast to other Scandinavian countries, Norway’s pension schemes allow a consultant to act as the appointed actuary. The regulatory body, the KreditTylsnet, has a list of approved actuaries, some subsidiaries of insurance firms.

Supplementary pension plans are usually offered by employers and funded mainly through insured arrangements, though there are self-administered schemes. Consulting actuaries can carry the legal reporting requirements for these schemes, including an annual report to the regulatory authorities.

Lisa Pedersen, at the former Watson Wyatt office in Oslo, now taken over by Norske Liv Consulting, says the firm also gets involved in the full range of services including scheme and benefit design and administration and work relating to SSAP for internationally operating clients. Investment advisory work is growing.

Only DB schemes can be provided, although there is pressure for a change in the law to allow DC schemes. This is expected but not immediately.

Finland

Finland’s mandatory TEL system insists on private externally funded provision by employers, producing pensions of 60% of final earnings after 40 years. But the strictly controlled regime has not resulted in a proliferation ofadvisers.

Five specialist pension insurance companies control 80% of the market , serving the 200 or so pensions foundations, set up by individual employers or groups of employers. Self-administered schemes, allowed for larger workforces, make up the rest of the market. Supplementary schemes are run by employers.

With generous mandatory coverage, the limited occupational supplementary arrangements are the main area for consultants. At Oy Porasto, one of the main consultancies, Pentti Tervula says that in addition to liability and provisioning work, the firm works on scheme design, benefit administration, record-keeping and communication matters. It does not find much call for advice on the asset side.

One independent consultant making inroads into the investment area is Oli Pusa, who sees an increasing need for these services, though what he is providing is still unique in Finland.

Switzerland

Private pension provision has been compulsory in Switzerland since 1987, sparking an 8 to 10% annual funds growth rate, one of the fastest in any European pension fund sector.

The parallel development on the investment consultancy side has been significant. Local and international firms are active in manager searches and direct management services have proliferated. But Swiss funds are only gradually becoming more performance-oriented by turning from internal to external management. Some have even taken management back in-house.

But the case for outsourcing advice and specialist services is a strong as ever. A Swiss consultant observes that most single pension funds find this too expensive and will miss economies of scale unless they go outside for management and other services.

On the actuarial side, outsourcing has expanded. Relatively few actuaries are employed in-house. Moves to go to DC are under way and consultants see opportunities for this market.

Austria

The pickings for pensions advisers and actuarial consultants have been limited in Austria. This could change as employers are put under pressure to provide more occupational plans.

The most common occupational pension is the ‘pension promise’ financed by internal book reserves. But Pensionkassen are also used. Dr Fritz Janda, general secretary of the Association of Pensionskassen in Vienna, explains that these ‘funds’ are set up as a joint stock company. “Companies with more than 1,000 members can found their own Pensionskasse. Organisations with less than 1,000 members can join multi-employer Pensionskassen, which are predominantly run by banks and insurance companies.” There are some advisers looking after the Pensionskassen market, he says.

Italy

Italy’s pensions scheme market looks poised for take off once legislation is in place. Tito Chini, a consultant with Towers Perrin in Milan says: “There are good opportunities for pensions consultancy, but there is much education to be done.” In particular he sees “potential for conversion of old plans, design and administration of new ones and evaluations”.

Watson Wyatt consultant Chris Mayo comments: “It is hard to anticipate which way the consultancy market will go. The chemical industry wants an industry fund and employers may decide to set up their own. But if it is along industry lines, involving unions, it will be more political and there will be fewer opportunities for consultancy. But if employers opt to go the individual company road, setting up their own investment vehicles, needing evaluation and advice, there will be opportunities for consultants.”

Spain

There will be a “substantial increase in pensions consultancy” with the changes coming through after 1999, predicts Ian Hinton, a senior consultant with Aserplan in Madrid. “As Spanish companies try to decide what their future options are - what finance mechanisms to use - there will be more actuarial and consultancy work.” Much of the work is at a basic level, helping companies to ascertain their real liabilities and how best to meet them.

Alisia Sanmartin, with Towers Perrin in Madrid, sees new opportunities in both asset management advice and communication services, as the new approach takes hold. “People do not know the benefit or cost of pensions and employers need help in communicating these matters to staff.”

Hinton sees the switch to DC increasing apace. “Companies want to know from consultants how best to make financial and other changes to implement these plans.”

Portugal

With the Portuguese government expected to reduce its commitment to pension provision, consultants could find the market opening up.

In addition to multinationals, the market is among larger firms, including newly privatised tobacco, cement and electricity companies. Employers look for asset-liability studies as well as advice on scheme design.

Berni Thomas, a senior actuary with Watson Wyatt in Lisbon, says work includes making sure company pension figures conform to international accounting standards. “We also perform audits of actuarial plans to see if the assumptions and investment returns are reasonable and how the plan compares against an international or peer group benchmark.”

Pedro Summer, managing director of William Mercer, says: “We are carrying out actuarial valuations and transferring old book reserve liabilities to life insurance vehicles. With frequent changes in the country’s tax laws clients are having to adapt their pensions plans and change their funding all the time.”

Conclusion

With pensions markets ranging from the unsophisticated to the very developed, perhaps oversupplied, consultants have to press their case continuously. And whether it is fee- or commission-based, the quality of service and the professionalism with which it is presented are what will ultimately convince clients of the worth of the advice.

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