One lesson learned from Mercer's abrupt decision to end its consulting to U.S. public defined benefit plans: Plan fiduciaries use at their own risk firms that seek to limit financial damages for their consulting work.
With many public pension plans suffering deep funding shortfalls, public fund executives could start asking who is to blame. They might look at the presumably deep pockets of their investment advisers and consultants to make up some of the funding gap.
The failure of states and cities to adequately fund the pension plans they sponsor might account for the bulk of the underfunding. But officials at public pension funds might examine whether malfeasance in the consulting industry contributed to the shortfall.
With an action seeking, say, 10% or 20%, of the underfunding, the amounts would be considerable in helping finance liabilities, but costly to the consultants.
Public fund action over misstated valuations has occurred over the years on the actuarial side involving a number of firms. Mercer was said to have put limits on its liabilities for its actuarial work but was unable to do so for investment consulting. In leaving the business, Mercer might have sought to cut losses from actuarial and investment consulting. In the past 18 months it agreed to pay a total of $550 million to settle separate lawsuits brought by the two public funds, alleging negligence in actuarial consulting work. In both cases, Mercer denied liability, saying in a statement, as reported by Pensions & Investments: “We stand behind the professionalism and integrity of our investment consulting work for the public sector. Having said that, we are always evaluating our business and making prudent business decisions, and risk is certainly one factor that we consider in these decisions.”
The decision also raises the question of why Mercer didn't sell that part of the business.
If a business has value, you don't close it, you sell it. Mergers and acquisitions are common in the investment consulting industry. Just this summer, for example, Hewitt Associates Inc. bought Ennis Knupp & Associates Inc. and then Aon Corp. bought Hewitt. Closing a business, rather than selling it, suggests the possibility that a dark cloud hangs over it. If it does, it might cover other public pension plan consulting firms as well.
But the die might already be cast. If a bell is tolling for one consultant, it could ring for others as well.