How consultants can prepare for scheme consolidation

These 6,000 schemes have a captive membership, so are not competing with each other so far as their end customers are concerned.

Each pension fund has assets to be invested and needs administration, a trustee board and professional advice. Each scheme also needs governance, systems and control processes. There is a lot of duplication of the infrastructure supporting these funds and, of course, each scheme spends money maintaining this infrastructure. This does not seem to be terribly efficient.

The investment consultancy business model needs an overhaul

In contrast, the industry servicing schemes is highly concentrated. There are only a handful of global investment consultants and not many more actuarial advisers, legal advisers, custodians and asset managers.

The benefits of scale

While there is some competition between these service providers, the market has more of an oligopolistic character than that of full competition. Unsurprisingly, there are few initiatives coming from the service providers to change the structure of the market.

Pricing is one area where the nature of the market is painfully obvious. The current pooling of 89 Local Government Pension Scheme funds is bound to prove that substantial savings can be made in investment management fees thanks to increased scale and bargaining power. The Project Pool working group of 24 local authorities estimated that annual savings of up to £300m could be achieved through efficiency gains.

Similar initiatives are being undertaken in the private sector. Some multinational corporations are consolidating their investments and have started providing advice to their local pension funds through a global consulting unit. Multinational investment committees are another example of consolidation, diminishing the need for local consulting. 

There are also consolidation initiatives coming from existing companies that currently service one or more pension funds and want to create scale for themselves by offering their services to other schemes.

The rationale is straightforward: scale allows a pension fund to attract and retain talented and knowledgeable individuals. Larger funds can afford larger teams. As a result, the risk of becoming heavily reliant on a key individual will be reduced, thus safeguarding continuity of service.

It will be easier to maintain the necessary levels of expertise to deal effectively with external suppliers whose interests are not always aligned with those of the schemes. 

Embrace scheme consolidation

So what does pension fund consolidation mean for investment consultants? For one, it will be increasingly difficult to get away with charging substantial fees for a standard and often average service. The traditional consulting model of leveraging partner time and experience by getting junior staff to do the work will come under increasing pressure.

Fixed project fees and retainers are less appropriate for an increasingly diverse group of pension schemes that need a service tailored to their liabilities and sponsors. In short, the investment consultancy business model needs an overhaul.

Fiduciary management, an evolution of investment consulting, will probably cease to be as popular as it is at the moment – at least as a bundled model. While there will still be demand for certain aspects of fiduciary management, individual modules will become much more transparent in terms of costs and fees.

The successful investment consultants will embrace pension fund consolidation. The existing business model is going to be challenged no matter what, so it is important to be prepared and not taken by surprise.

The best approach will be to think about how to develop partnerships with clients that work for both parties. Relationships are going to become more equal, with the consultant providing specific expertise from time to time in areas where the scheme does not have sufficient internal resource.

Pension funds will be run as professional businesses, and will demand professional external services. If this does not happen it will be only too easy to take activities in-house and put even more pressure on the provider industry.

Bart Heenk is managing director at consultancy Avida International