Towers Watson marching to a different beat

Towers Watson & Co. is charting a divergent path from fellow investment consultant heavyweight Mercer when it comes to U.K. fiduciary management, a sign that players already are beginning to reposition themselves in the burgeoning field.

Mercer LLC, convinced that significant growth is ahead for what's variously known as implemented or delegated consulting, or fiduciary management, has widened the scope of its offering and is investing resources to capture that growth.

Towers Watson officials, though they expect fiduciary strategies to attract more assets, see it as being a more complementary business, and one that's capacity-constrained.

Broadly defined, fiduciary management refers to outsourcing decisions and implementation that have been the responsibility of pension fund trustees and staff. However, in practice, a spectrum of services is offered, with trustee involvement in setting asset allocation, hiring and firing managers, and hedging liability risks decreasing in more fully implemented models.

Towers Watson dwarfs all fiduciary competitors with £25 billion ($37.6 billion) managed in its Advanced Investment Solutions strategy, which is at the advisory end of fiduciary services, with trustees still quite involved.

Paul Trickett, Europe, Middle East and Africa head of investment at Towers Watson, said fiduciary management won't be right for every pension fund. He views fiduciary management as one end of another spectrum, that of pension fund governance. The firm advises clients they need to either boost governance by adding internal expertise (like a chief investment officer) or external resources (like a fiduciary manager) or they need to simplify (especially through the use of passive investments).

Towers Watson is putting a lot of resources behind low-cost and simple approaches. That includes developing “better beta,” a way to provide improved simplified pension governance. “That's a relatively underdeveloped (strategy),” Mr. Trickett said. It is a scalable solution well within the firm's strengths, he added.

Mr. Trickett said Towers Watson's fiduciary business won't likely ever get larger than £50 billion because it's not scalable. Towers Watson will have to cap the growth of its fiduciary business at some point so it won't detract from the firm's core mission of being an independent investment consultant, he said.

The firm's U.K. investment consulting clients have some £300 billion in assets.

“We think (our current) model works,” Mr. Trickett said, adding that he recognizes a growing demand for delegated services. He said Towers Watson would consider expanding its offering if company executives felt it would add value for clients and there was sufficient demand. “We have to reach a view on whether it's a direction we want to go,” he said.

Mercer, on the other hand, sees fiduciary management as a major growth area. The firm oversees about £8 billion in mandates at the advisory end of the fiduciary spectrum, and it expects its more implemented fiduciary mandates to top £2 billion within the next two months.

“Mercer has invested a significant amount in infrastructure ... to ensure our offering is robust from start to finish,” said Tom Murphy, worldwide partner and European head of investment management business at Mercer. He declined to say how much the firm had invested in the business.

Mercer moved beyond its initial implemented consulting model and developed a fiduciary strategy — called the dynamic derisking solution — that fully manages a pension fund's assets and liabilities to reduce risk as its funding level rises. Mercer runs approximately £600 million in this strategy.

Mr. Murphy expects Mercer's model will continue to evolve to include services like longevity hedging and buyouts/buy-ins. “Our delegated offerings are evolving to capture the complete range of what we do in the consulting world,” he said.

Fiduciary players are closely watching a search by the £3.5 billion Merchant Navy Officers Pension Fund, Leatherhead, England, for a firm to act as “delegated chief investment officer,” a possible replacement for incumbent Towers Watson. Winning the mandate would be a cornerstone for any manager and is expected to raise the profile of the industry in the U.K., providers said. KPMG is assisting in the search, which is expected to be completed by the end of the year.

Providers expect as much as £50 billion might be up for grabs in 2010 in the full spectrum of delegated services, while the amount in full fiduciary mandates is expected to reach £5 billion to £10 billion this year.

To date, most fiduciary managers speaking on background point to Cardano Risk Management BV as a particularly strong competitor. “Cardano have obviously had some big wins, and their model is one that tries to align their interests with their clients,” one competitor said, speaking on background.

Another competitor, also speaking on background, said another Cardano strength is the team recruited to run various services within its fiduciary offering. “We're able to cover quite a lot of space with people who have significant investment experience,” said Phil Page, Cardano's London-based client manager. “We think as a whole it's about as well rounded a team as we see out there.”

Cardano runs about £2 billion in fiduciary mandates, including 20% of the assets of the £1.1 billion ASDA Stores Ltd. Group Pension Scheme, Leeds, England. That mandate will grow to 100% of assets over time, Mr. Page said.