Corporate pension executives are putting more demands on investment consulting firms for more specialized and complex advice, giving a boost to the economics of a business that still faces challenges.
Consultants, whose business models were threatened by the decline of the traditional defined benefit system, see new business opportunities by stepping in to assist plan executives with:
- moving to fiduciary management to outsource discretionary pension plan decision-making;
- derisking to mitigate equity market volatility and low interest rates that have combined to swamp pension funding levels;
- integrating pension plan funding into corporate financial strategy and reporting;
- moving away from a long-term static strategic asset allocation in favor of macro and tactical strategies with the latitude to respond to market events;
- diversifying into more types of alternative investments to enhance returns while mitigating risk; and
- making risk management more robust.
In short, the work is expanding even if the traditional client base might not be.
“The world has become increasingly ... complex with the types of strategies out there and demands of clients ... for a broad range of knowledge and capabilities,” said Kevin Turner, managing director, consulting, Americas, Russell Investments in Seattle. Consulting “is so much more varied now.”
“We spend a lot more time with our clients focusing on how to manage risk and ... liability-management techniques than focusing (just) on a range of return-seeking outcomes,” Mr. Turner said. “It's been more work (and) it is focused on more areas.”
Jeffery J. Schutes, senior partner and U.S. investment consultant leader, Mercer Investment Consulting Inc. in Chicago, said derisking and more integration of pension plans with corporate finance is a boon to the consulting industry.
“Even though these plans are frozen and may not be offered anymore, the assets still have to be managed, the liabilities still have to be managed. So unless the plan totally goes away, there is absolutely work for the investment consultant.”
“The trend in the institutional space has been a move away from the classic 60/40-type (asset allocation and) the classic (investment) style boxes and into alternatives,” said Daniel Celeghin, partner, Casey Quirk & Associates LLC, Darien, Conn., a firm that studies the asset management industry for its work in providing strategic business development consulting to money managers.
“That trend has opened the windows for specialty consultants (and) ... more deeper specialized knowledge.”
Now, “different clients need different things,” Russell's Mr. Turner said. “There is no one-size-fits-all anymore. ... Clients are ... focusing on their specific needs and objectives that lead to different ideas, different allocations, different strategies and so on.”
These deviations are “actually causing a real problem with folks that still want to do a lot of peer comparison-type work,” unlike the recent past when comparisons were easier because “true 60/40 tended to be a pretty decent description of what an average asset allocation was, at least for a corporate plan,” Mr. Turner said.
“The classic 60/40 approach doesn't work,” Mr. Celeghin said. “In a world of tremendous instability ... we cannot use classical financial methods.”