The changing face of the consultant

Peter Davy reflects on the ever evolving role of the consultant across Europe

If pension consultants needed reminding of the long term fragility of their business model, they have only had to look to the UK recently. It’s the biggest source of clients in Europe, with a large DB market peculiarly dependent on their advice; 95 per cent of schemes there use external consultants, according to Mercer. However, it has not been hard to find reminders that this will not last.

On the one hand, the latest figures by the UK’s Pension Protection Fund show the problems for DB schemes are as acute as ever. Scheme deficits in February were at their worst levels for five years, with a combined deficit of £97.5bn. On the other, leisure group Rank became the latest to opt for a buy out, with the sale of its £700 million scheme to Goldman Sachs subsidiary Rothesay Life. As the UK’s Financial Times columnist Tony Jackson stated, it was just a reminder that the “the corporate pension model is bust”; most companies are now looking for an exit. Outside Europe, meanwhile, Australia, which has seen a large and rapid shift to DC, provides a constant reminder that the future could look very different.

And competition for the remaining business is increasing from non-consultants too. “It’s coming from a variety of sources,” explains Paul Deane-Williams, senior investment consultant at Watson Wyatt. The rise in asset liability modelling, LDI and the greater range of solutions pension funds are using has seen asset managers and investment banks begin offer free advice as well as products.

At the same time, the increasing complexity and the range of investments pension schemes are using is pushing up costs for research and staff. Because it’s not just business that the consultants increasingly compete for with the new market entrants; it’s for talent too. As Alistair Wilson, head of institutional business at Neptune Investment Management, says: “It’s probably quite good news if you’re a newly qualified CFA, because if you’ve got that expertise consultants are increasingly going to have to pay for it.”

Overall, business as usual looks untenable. “There used to be quite a comfortable relationship with everyone doing their bit. Everyone knew where they were,” says Wilson. “Now everyone is encroaching on each other’s space.”
Despite this, DB schemes remain the consultants’ core business. As well as the UK, the big markets continue to be the Netherlands, Germany and Switzerland, with smaller markets in Ireland, Sweden and Norway. “Most of the work is still in those countries with big DB markets,” says Colin Haines, partner at Lane Clark and Peacock.

Indeed, the truth is that it is easy to exaggerate the decline of DB. For a start, the direction hasn’t been entirely one way. As Paul Kelly, a senior consultant at Towers Perrin notes, you just have to look at the biggest three markets: the UK, the Netherlands and Germany. “Three or five years ago Germany wouldn’t have been on that list,” he says.
The rise of contractual trust agreements (CTAs) has provided a considerable boon to consultants – a “seismic shift” in the way pensions there are funded, says Kelly. Ninety-five per cent of the top DAX companies now use external advice. “People still look on Germany as a book reserve country, and to an extent it is,” he remarks, “but it’s also now got a funded pensions market that is probably as big as the Dutch one.”

Elsewhere, too, the much discussed decline of DB has yet to have a real impact on consultants. In fact, schemes are more in need of advice than ever.

“DB is dying,” admits Oliver Rolands, head of the retirement practice for UK and EMEA at Aon Consulting. “That’s probably true. But it’s going to be a long and torturous death.” For consultants at least, that’s good news.

Nick Evans, principal consultant, investment advisory at KPMG, agrees. “Most schemes have an end game in mind, and they’d like to get there in five years time,” he says. “But some are going to take a lot longer. Most pension funds need to get to a much higher funding position before they can become self sufficient.”

Indeed, while the number of DB schemes is slowly shrinking, scheme deficits, along with increased regulation and the complexity of the available solutions, have seen the amount of work for consultants on each scheme rise steadily. It’s not just increasingly common for schemes to hire separate consultants for actuarial advice; the stress put on governance and funding concerns increasingly see companies and trustees take separate advice. LCP, for instance, has a large number of corporate-only appointments. And, at Neptune, Wilson says trustees are even occasionally seeking a second opinion when they’re not convinced they’re getting the best advice from their initial consultant.

Such trends are perhaps most notable in the UK, where schemes lean heavily on their advisors, but you can see the same influences in action in countries such as Germany too. In fact, some argue that the reason for consultants’ increasing popularity there has less to do with CTAs than factors that would be well recognised elsewhere.
“The main reason for their growing importance is the volatility of the markets and the fact that more and more clients are structuring their business in terms of asset liability modelling,” says Hans-Joerg Frantzmann, head of institutional sales at Fidelity International in Germany.

“Institutional investors here now understand they’re in a complex market and they recognise that they need help with structuring their assets, modelling their liabilities and putting effort into areas like manager searches and risk management reporting.” Their expertise in this area also helps explain why the big international consultancies have finally broken into the German market, he suggests, after their abortive attempts in the early 1990s.

In fact, it’s probably a Europe-wide, if not global, trend. Even in the Netherlands, where pension funds tend to rely on in-house expertise, there is increasing openness to consultancy.

“The rate of change varies across different geographies, but the direction is the same,” argues Robert Gardner, founding partner at consultant Redington Partners. “Globally there’s a call for pension funds to understand their assets and liabilities better and have much better risk management controls. That means the complexity of managing a pension scheme has gone up quite significantly.” Back in the UK, a recent survey by Aon of 250 DB scheme trustees found 98 per cent saying their workload had increased in the past five years. Over 70 per cent of those running schemes of more than £500 million said they found it difficult to meet their responsibilities.

New directions
No one, though, argues that it can last. In the long-term, the need for consultants to seek out new areas of business remains. The question is where they may turn. Already, though, clues are starting to emerge.

“The biggest trend currently, in the UK at least, is a polarisation as the competition in consultancy increases,” says Deane-Williams. On the one hand, some consultants are moving towards product provision, focussing on manager of manager services and offering implemented consulting. Some consultancies, such as P-Solve, are blunter and say the term is effectively being used as a euphemism for fund management. As Wilson points out, it is certainly difficult for consultancies who do offer such services to complain that fund managers and investment banks are treading on their toes by moving into consultancy.

Not everyone is convinced that the future of consultancy lies that way, though. At Aon, which sold
its multi manager arm to Close Investments last year, Rolands argues that customers may be too nervous about potential conflicts of interests for the concept to really take off.

“It’s a shame because we felt it was essentially just an extension of our consultancy services, but having given it a go we concluded the model wasn’t as acceptable to the market as we’d hoped,” he explains. This is isn’t necessarily fair, he says, because in many cases trustees follow the advice of their consultants without much challenge, and an implemented consulting route may be more effective when schemes need to act quickly.

So where might those sticking to pure pensions consultancy look?
For the international firms part of the answer is likely to be in increasing consolidation in the market. In places like Germany, Frantzmann argues the big players have now learned their lesson and have co-opted German-based experts to help them establish a grip on the market. Elsewhere, too, the trend is towards a bigger market share for the international consultants. There’s also “a creeping trend” towards global appointments by the big multinationals, says Rolands. “There’s been no explosion, and it’s a question of how long that takes, but I certainly think it will continue.
“Frankly in that market smaller players can’t compete at all.”

What effect the nascent pan-European pensions market might have here remains open to question. Of course, if it takes off, it will benefit the larger players – but that’s a big “if”. Haines says he doesn’t see much demand for it outside the really massive European multi-nationals. Others are more optimistic.

More important, though, are the opportunities provided by DC generally. Such schemes already account for about a third of UK assets and globally will exceed DB assets by 2014, Deane-Williams points out. “We’re under no illusions,” he says. “DC is the way things are going.”

On a simple level, there will be consulting opportunities with new private sector markets opening up in places like France, with the Perco market, and in Italy, as well as Eastern and Central European countries. After all, on the investment side consultants’ roots are in manager selection and monitoring performance – services that remain as relevant as ever.

But more complex solutions are also likely to come into play. As Roland points out, DC means different things across Europe, and where that involves any kind of guarantee, the lessons consultants have learned on the DB side in recent years are likely to prove valuable. “Quite often DC schemes in Europe are some form of hybrid and as soon as you’ve got any guarantees there’s an element of DB and the financial risk associated with that,” he says.

Even where this isn’t the case, though, it’s expected that as assets accumulate in DC schemes, employers will be prompted to re-examine them. “I think there’s going to be a big increase in the amount of advice done on DC,” says Evans. “Already we’ve got clients revisiting the schemes they put in place four or five years ago and thinking
about how the skills we learnt on the DB side such as diversification and targeted returns might work in that environment.” Long term, he suggests, we could see many opt for some hybrid solution.

For consultants now, of course, the focus remains firmly on helping companies and trustees looking towards the end game with DB. However, when planning for the future, there’s still some doubt that pure DC arrangements will prove to be the final word. If they’re not, at least the experiences of the recent past won’t have been entirely wasted.

Written by Peter Davy, a freelance journalist