Two giant pension funds want to set up standing pools of consultants to labor on occasional projects -- a new work concept some major pension consultants said they don't relish.
The $47 billion Washington State Investment Board, Olympia, has decided to stop keeping consultants on retainer. It intends to develop a pool of approved consultants from which it can pick the "best and the brightest" for particular projects, said Christopher Ailman, chief investment officer.
The $141 billion California Public Employees' Retirement System, Sacramento, also wants to set up a pool of approved consultants. But CalPERS would continue to have retainer consultants.
Mr. Ailman believes a significant part of the consulting business for pension funds could shift to project work and away from retainer relationships.
"We will probably be the first ones to get some industry reaction, and then CalPERS will see how people respond," he said.
Consulting on a per-project basis isn't new, but it is uncommon for pension funds to set up standing pools of consultants. It is also unusual for pension funds to switch to project relationships from retainer relationships.
In Washington state, the investment board didn't renew its retainer contract with Wilshire Associates Inc., Santa Monica, Calif., when it expired June 30. Officials for the fund want Wilshire and other consultants to consider being part of a pool of three to five that would work on projects.
"We have been trying to get some of those full-service consultants to divide up their business and compete on a project basis," Mr. Ailman said.
A subtle -- but big -- shift has occurred in pension consulting because of the availability of analytical software databases that in-house pension staffs can use, Mr. Ailman said. That's a key reason WSIB is looking at the pool concept; Mr. Ailman wants to use consultants more for their "intellectual property."
WSIB, for example, uses Wilshire's Compass product, a consultant-in-a-box; Mobius Group Inc.'s M-Search database; and Ibbotson Associates Inc.'s EnCorr analysis software.
At CalPERS, Wilshire is the general retainer consultant; Pension Consulting Alliance, Studio City, Calif., also is on retainer. But CalPERS board members approved a search, scheduled to begin in August, that would establish a pool of consultants.
Any consultant in the CalPERS pool could replace a retainer consultant.
SOME FIRMS SAY NO
Officials for Frank Russell Co., Tacoma, Wash., quickly refused the WSIB offer to become part of a pool.
Officials for Wilshire Associates are considering being part of WSIB's proposed pool. But Wilshire is "not enthused" about consulting work on a project basis, said Steve Nesbitt, a Wishire senior vice president who heads its plan consulting division.
"We have never been a project consultant. We do very little of it," Mr. Nesbitt said.
Wilshire would likely reject the idea, he said, except that WSIB subscribes to Wilshire's Compass.
Both Frank Russell and Wilshire do some project consulting work. But officials for both firms said they usually accept only a small number of such assignments, in hopes of getting retainer contracts. They also will do occasional projects that they feel will in some way significantly advance their consulting expertise in pioneering areas.
Jack Marco, president of Marco Consulting, Chicago, said he is "not interested" in working on a consulting project where a retainer relationship isn't a possibility.
Officials of Asset Strategy Consulting Inc., Los Angeles, and Hewitt Associates in Rowayton, Conn., also indicated doubtful interest in doing project consulting without the possibility of going on retainer eventually.
SOME SAY MAYBE
Other consultants said they might agree to be part of a pool without the prospect of retainer work, but they said they might have conditions or qualifications -- such as yearly standby fees (which WSIB is not offering so far) or the purchase of the consultant's databases (something WSIB might do).
Some consultants who said they might do continuing project work also said such assignments would have a lower priority than work for retainer clients.
Nori Gerardo, a principal in the Portland, Ore., office of PCA, said she thinks her firm will respond to Washington's request for proposals. PCA has done significant project consulting work, particularly on real estate.
Whether retainer consulting or project consulting is best for a client is up to the client to decide, she said.
At Callan Associates, San Francisco, which does project consulting, Ronald Peyton, president, wouldn't comment directly on the two pension funds' concepts. But, he said, he doesn't think Callan would have any problem working as part of a pool of consultants for project work.
Kamal Duggirala, president of BARRA RogersCasey, said his firm is "happy" to do project consulting work, but only if it is a "good fit" and the firm has the time.
Work for retainer clients would come first, he said, and RogersCasey would want, after initial costs are met, an efficient work project selection process so that it wouldn't have to spend a lot of money on bidding individual projects.
Regardless of the consultants' preferences, establishing pools of consultants makes sense for some pension funds, Washington state's Mr. Ailman said.
NEEDS HAVE CHANGED
William O. Bell III, chief of policy management at the $82 billion Florida State Board of Administration, Tallahassee, said his fund isn't planning to set up a pool of consultants.
But he agreed with Mr. Ailman that what a pension fund needs from a consultant has changed. The Florida fund's staff has ample consulting software, such as Wilshire's Compass, to do work that was once done by the fund's consultant, he said.
Another change is that custodians are doing an excellent job of manager and fund performance analysis, also work once done by consultants, Mr. Bell said. State Street Bank & Trust Co., Boston, is the Florida fund's custodian.
What Mr. Ailman's fund wants most from consultants, he said, is "that subjective, intellectual value."
Mr. Ailman is concerned his fund might not get the same focus from a project consultant that it would from one on retainer and will look closely at that issue, he said. He also realizes fees are an issue, and he would try to get adequate compensation for pool participants.
Consultants with retainer relationships can hire more qualified consultants and do less marketing, Wilshire's Mr. Nesbitt said.
A retainer consultant also provides a fund with stability and accountability, and is willing to say "no" to "bad ideas," he said.
Consultant Mr. Marco said he believes project consulting "is a lousy way of doing things.
"Any project that you are working for an investment client . . . you have got to understand the client. . . . The whole deal as far as I am concerned is understanding the plan, what their needs are, and what the plan is all about."
At Hewitt Associates, Philip Grant, manager of the Hewitt Investment Group, said his firm does only a little project consulting. For Hewitt to take on a project, he said, the firm must be paid fees high enough for the project to be profitable. Also, Hewitt must have the capacity to handle the project after it has done its retainer work.
"What is really amazing is that a lot of these funds will pay very large amounts of money for management fees, and then they try to squeeze the consultant who is probably more important to the investment process and with whom they deal more," said Richard E. Dahab, president of the pension consulting firm Dahab Associates Inc., Bay Shore, N.Y.
But it can be difficult to get a pension consultant, said Florida's Mr. Bell. When the Florida fund's former consultant, SEI Corp., sold off its consulting business, Florida asked 70 consultants to compete for the vacancy. Only six responded, he said.