PENSION FUND CONSULTANTS & MULTI MANAGERS
Pension funds’ delegation of investment power to advisers sparks concern, reports Alex Catalano
In the UK, Mercer, Aon Hewitt, Towers Watson and Hymans Robertson dominate the pensions world when it comes to giving real estate advice. The first three are global behemoths and US-owned, while Hymans Robertson is UK owned and focused, though it has a global alliance (see table).
Their dominance is disquieting to some in the real estate industry. “I think one of the biggest issues with consultants is that they have a stranglehold on the pensions market in the UK,” says one fund manager. “The top four control the vast majority of capital – probably 60% or 70%. I think it’s worth asking whether this is healthy.
“The situation has got more extreme in recent years, with tightening pension regulation and a focus on governance. Does this encourage a dynamic, competitive market where the client wins, or one bogged down in process and excessive box ticking?”
Allied to this issue is delegated consultancy, also called fiduciary management or ‘implemented solutions’. This is where pension fund trustees outsource the decisions about asset allocations and managers to investment consultants, a practice that is on the rise.
According to KPMG, £23bn of UK pension fund assets, in 174 mandates, are now fully delegated, though not all of these will include an element of real estate. Two thirds of these are for pension funds with less than £250m.
However, it is not just small funds that outsource their investment decisions. Both the £4bn Jaguar and £3bn Merchant Navy Officer’s Pension Fund have Towers Watson as their delegated chief investment officer.
A step beyond just advising
This service is clearly a step beyond just advising on investment management and is a growth area. The big three consultants – Aon Hewitt, Towers Watson and Mercer – all offer this service.
Hymans Robertson does not, though it does provide a service overseeing delegated consultants/fiduciary managers. In 2011 it won a mandate as independent adviser on the Merchant Navy Officer’s fund, to monitor and challenge Towers Watson, the delegated chief investment officer.
Delegated consultancy is marketed as a solution to the complexities and volatility of today’s financial markets – complexities that trustees and pension funds may not have the time, or in-house expertise, to handle themselves. For pension fund clients, especially the smaller ones, delegating your investments to your consultant simplifies your life. Under this model, trustees define the strategy and risk/return parameters, but leave the consultants to do the rest.
“Our investment experts construct portfolios on behalf of trustees, using carefully selected external fund managers, robust risk controls and proven investment processes to achieve trustees’ plans,” says Aon Hewitt. The consultant does this for 48 pension schemes in the UK, which account for £4.1bn of assets. Most delegated consulting involves other asset classes, but it is growing in real estate. Towers Watson, for example, has £400m in real estate assets under delegation for UK pension schemes.
Townsend, the US-owned global giant that started moving into the European real estate arena a couple of years ago, has been “investing with proprietary partner relationships” since 2007. “They are moving into the space where having given the strategic advice and the portfolio they have the discretion to pick the product themselves and they don’t have to go back to the client,” says one fund manager. “At that point they look quite similar to a discretionary multi-manager, which is a bit of a concern.”
Blurring the boundaries
Another manager adds: “There is danger that the boundaries between being a principal and being an adviser are becoming blurred. I can understand why some fund managers become uncomfortable in having a conversation when you’re not entirely sure that you are seeing the whole of the agenda. On occasions, it feels more like you are talking to a competitor than to a consultant.”
A third puts it more bluntly: “What they are doing is cutting out multi-managers and/or cutting out the relationship between the pension fund client and the underlying investment.
“Consultants will say they have Chinese walls, but we think there is strong evidence that this is not the case. I think they rock up and say to a client, ‘You want to put £50m into real estate, give it to us. We’ll provide advice and recommendations and it will be cheaper.’
“So now consultants are doing the investing as well as the screening of the managers. I don’t have a problem with competition, but they are also the ones who control the game.”