DB clients will be finalizing their de-risking strategies over the coming three to five years, and Mercer is well-positioned to serve them, said Jeffrey Schutes, Chicago-based president of Mercer's investment consulting business. It could be up to 10 years before their assets peak, followed, for many clients, by an “end game” of 20 to 30 years in closing out those plans, he said.
Over the coming decade, helping corporate DB clients de-risk will be a “huge opportunity” for consultants, and longer term there'll be opportunities to grow in segments such as defined contribution, endowments and foundations, and wealth management, agreed Richard Nuzum, president and global business leader of New York-based Mercer Global Investments.
Consulting veterans predict a small, but growing, minority of corporate clients will terminate their DB plans and purchase annuities. Most corporate clients, meanwhile, will likely reach the point where they're largely immunized — with 80% to 90% of their portfolios' assets in fixed income. Others might well remain in the “total return world” with a 60% equity-40% fixed-income asset allocation.
Dylan J. Tyson, vice president and head of the pension risk transfer business team with Hartford, Conn.-based Prudential Retirement, said market players might be underestimating the gathering momentum behind corporate moves to offload their pension risks.
He cited a soon-to-be-published Prudential survey of 171 chief financial officers of companies sponsoring DB plans with at least $250 million in assets, which showed more than 30% “somewhat or very likely to transfer risk management to a third-party insurer over the next two years.”
The current pace of pension “buyouts” — roughly $2 billion to $3 billion a year of a $2 trillion corporate DB marketplace — could rise to roughly $20 billion a year, driven by the growing appreciation among corporate executives of the non-core economic risks they face from their benefit plans, Mr. Tyson said.
For the bulk of corporate DB clients intent on de-risking their plans over the next few years, consultants differ on the implications for their business as those plans better match liabilities by boosting fixed income. While some insist those portfolios will still require plenty of consulting services, one industry veteran, who declined to be named, said the fees for advising a fully immunized portfolio will be, at best, one-fifth of what they are for full consulting services.
The rise and evolution of DC plans, however, could provide a counterweight for consultants' coffers. For the moment, DC-related services may involve less work and lower fees than DB-related services, but as corporate executives put ever-greater emphasis on ensuring their DC plans are structured properly, that could change, said a senior Connecticut-based investment consultant who declined to be named.
And several consultants predict that, once a recovery in funding levels allows a better match of DB liabilities and assets, executives of sponsoring companies will be more willing to outsource management of those portfolios, rather than retaining expensive internal staff to oversee them.
With a five-year track record now for its U.S. manager-of-managers business — including the development of discretionary liability-driven investment offerings — Mercer will be able to serve the growing number of clients likely to seek implemented consulting solutions, Mr. Nuzum said.
One fast-growing investment consultant that has yet to take the plunge into outsourcing is NEPC LLC, Cambridge, Mass. In a recent interview, Richard Charlton, chairman, declined to explicitly rule out the possibility that NEPC would join the fray. “We want to continue to serve the unique needs of each client, while avoiding even the impression of any conflict of interest,” he said, adding “You can be sure we won't offer any proprietary products that would compete with the managers we research.”