New year, new challenges?
Written by Francesca Fabrizi
Now that more than a year has passed since Hewitt merged with Aon in October 2010, how are you feeling about it all?
Our main aim was that the merger would be smooth for everything outward facing - that client service would not be disrupted and that client teams would not be impacted by some of the restructuring we had to do. I think we achieved that.
I have been doing lots of client reviews and the feedback I keep getting is how pleasantly surprised clients are with everything, because we never took our eye off the ball. That continues to be the mantra – putting clients first.
Why do you think the merger was so well received?
I did a lot of roadshows in all the major countries we serve and what people could see was the strong strategic rationale for the merger. The two businesses complemented each other very well. For example in the US, Hewitt was the prime provider to the bigger clients whereas Aon served the middle market; and Hewitt had a big outsourcing capability which Aon didn’t really have. In Europe, Hewitt’s offerings were very much focused on pensions and HR whereas Aon did a lot more in the benefits space.
How does Aon Hewitt fit into today’s marketplace?
If you are a pensions and benefits manager, regional or global, the biggest challenge right now is ensuring the effective governance of all your plans and having adequate visibility of what is happening on the ground in different places. What we have brought to the market are the tools and the global footprint to allow you to do that. For example, the ability to compare the rates at which you are insuring the same benefit in different countries and then trying to rationalise how to get the best out of insurers on that. Timing-wise we have been lucky - there has been a huge emphasis on risk management and governance at a time when we have expanded our capabilities in both those areas.
Looking ahead, what do you see as the key themes in pensions and benefits?
As I mentioned, risk management and governance are key and I think they will be huge growth areas for us in 2012. Trustees and sponsors are under a great deal of pressure - because of the size of their pension plans relative to their businesses - to really improve their governance and avoid surprises. In response to that, we can offer a fully comprehensive enterprise risk management service – to give our clients a broader view of the risks they need to be aware of and help them to manage them going forward.
Another big potential growth area for us is administration, particularly in Europe where there are large numbers of pension and benefit plans that are still administered in-house and haven’t been outsourced yet. That is true both in the private and the public sector. I say ‘yet’ because we have learnt from the US that eventually nearly every single large pension plan will outsource their administration.
Aon Hewitt has done a huge amount in the longevity space in the UK, but is there much interest in the topic from the rest of Europe?
In the UK there is a big appetite for longevity data and the ways in which it can be used to better manage liabilities. There has also been interest from the Netherlands, Switzerland and Germany, so it is a growing market.
What we have done in the European arena is to try, as much as possible, to own the debate, the thoughts and the data on mortality within each of the key countries. In Switzerland, for example, we are the publishers of the mortality tables everyone uses for pension plans and similarly we play an active role in Germany and an active role in the Netherlands. In the UK, we even have our own postcode analysis which takes things beyond just the basic mortality tables.
How does Aon Hewitt’s delegated consulting offering differ from other fiduciary management type strategies?
Our offering is very respectful of the responsibilities and prerogatives of trustees, but provides an effective solution given the complex nature of the different asset classes out there and the fast pace at which decisions need to be made. So it is all about taking on part of the responsibility that trustees have difficulties fulfilling because of the limited amount of time and resources at their disposal.
Different firms offer different variations of this and it is a bit of a minefield out there, trying to understand who is doing what, but we are clear on what our offering is: we are a provider of a packaged service to trustees, whereby we have an investment management agreement with them.
We don’t manage the money – that is a key principle - but we select the managers as that’s what we are good at and we help the trustees set the strategy. We can also move managers in and out at our discretion, which is another key part of the delegation, because traditionally it would take two cycles of trustee meetings to make that kind of decision, by which time you could have suffered from many more months of poor performance unnecessarily.
What do you see as some of the big regulatory issues affecting European pensions this year?
Every country has its own challenges, which is one of the reasons why the area of pensions is so fascinating. There are similar sets of problems all over Europe but they are solved very differently depending on the particular bias or culture or regulation a country has.
For example, in the UK we have auto-enrolment coming up which is another responsibility that employers are going to have to take on board. Some of them – retailers in particular, where there hasn’t historically been very much pension provision - are going to have to shoulder this as an additional cost, as well as all the administrative processes that go along with that. Our clients are having to run quite fast in order to be ready and we are aware of lots of organisations that are less ready than they think.
As a service provider in this area, a number of things are going to be required of us. We are going to have to help companies communicate the implications of this to their employees, so multi-media communication is vital. Then on the administrative side, where we administer plans, we need to make sure the systems are ready and clients have made the right choices in what they need to do. That’s the big issue in the UK.
Separately, in the Netherlands we have a regulator that is approaching the regulation of pension plans as if they were commercial arrangements rather than voluntary pension promises backed by the employer’s covenant. So it’s less about employee protection but more about financial institution protection which I think is somewhat misguided, but that is the way it has gone.
Saying that, the new pension agreement does require employer sponsors and trustees to really think about how they are going to take advantage of the changes to be able to restructure benefits, so it is bringing in more flexibility which is a good thing. As a result we anticipate a surge of activity from clients wanting to take advantage of that. It has been two years in the making and it is still not quite finalised so there will be a huge pent-up demand that will be released into the market, so we, along with our competitors, will have to respond to that challenge.
The other big issue is the EIOPA consultation on the future solvency model for funded pension arrangements. The aggressive timeline of this potential change worries us. It is not clear that the current consultation process is really going to materially change the intended course of the legislators. Applying an insurance-like solvency regime to pension plans would create a huge impediment for employers to continue with funded pension arrangements. It’s a huge issue and the timing of these proposals with all the uncertainties in the eurozone is highly questionable.
Is Aon Hewitt planning to expand into new countries / regions?
In an ideal world I would like us to be as strong in every market in every offering. The reality is that, because of our legacy organisations and how we have evolved, there are areas of strength in some countries but there are departments in other countries where we haven’t quite developed (and I am talking more broadly about the business here, not just pensions). For example, corporate wellness as a theme is a very significant business for us in the Netherlands but not so much in the UK.
On the pensions side, the focus is primarily around the risk conversation - being able to have the asset/risk management capabilities - so we are looking to offer investment consulting in more of the defined benefit markets than we do today and then implement the liability matching side.
The strategy for growth is to learn from our success and experience in one place and try to build it in another - broadening our offerings amongst our existing clients as well as bringing new clients in.