A harvest moon and a partial eclipse
To kick off this year’s DB strategic investment conference, I did the good thing and turned up at a session which promised to see consultants Pete Smith and Elaine Torry act as sacrificial consultants with the prospect of getting a good working over from co-panellists including William Bourne and Denise Le Gal and Phil Triggs. The session was chaired by my friend and colleague Luke Webster who made sure this was a clean and friendly fight!
Since I am moderating , speaking and panellising today, I thought it helpful to note what was said yesterday;
What was said and how it went down.
Triggs informed us that the the best funded pension scheme is Kensington & Chelsea that doesn’t use pooling. This is clearly well known in LGPS circles but not to me. The session was not going to be about rehearsing received ideas!
Wholesome tributes were offered by Triggs from Westminster Council to Isio and Mercer and (the one that nearly got forgotten) Redington.
Denise Le Gal of Brunel said she used consultants on a project basis, mainly because most of the investment management was outsourced. For her the role of the consultant is evolving , they have not revolved out of the door but clearly she and not they was the boss. This on a day when Rachel Reeves made her feelings clear on consultants
Consultants and independent advisers
William Bourne was surprised that around 70% of funds use consultants but 30% don’t and the question is whether independent advisers do the same job.
“The independence of consultants is compromised by pooling” Bourne went on, arguing that the concentration of mandates might force consultants to mark their own homework,
Clearly there is a school of thought that thinks we should have a wider pool of consultants.
The specialist consultant
Elaine Torry saw a rising role strategic advisers for subject matter experts (brought in for public based work). Unsurprisingly she saw the consultants having an evolving role rather than staring at the revolving door.
Pete Smith said that all consultants weren’t all alike and ownership structure matters a lot in differentiating one from another. He felt fiduciary management leads to bad consultancy.
Measuring VFM from consultants
Luke Webster asked about value for money from consultants and whether buyers were favoring one business model over another.
Pete Smith made a pitch for employing consultants to keep consultants offering fiduciary management honest.
William Bourne was incensed by how consultants charge a few thousand pounds (quite a few thousand pounds ) to do a job of work, only to see the work being resold by the consultants to other funds. This begs questions about intellectual property. Who owns the value of consultancy , those who pay or get the money?
Have changes in the perception of risk evolved the consultant?
The conversation moved on to “risk transfer” and the role of consultants to “shed” pension consultants”. Denise Le Gal, who as well as running Brunel , chairs Brightwell, told the room, BT’s pension scheme has fallen from £60bn to £37bn in recent years (not just because of pensions paid but because of LDI). She said 2022 made it clear that gilts are not risk-free,
Torry went on to mention the skill shortage for trustee boards for DB schemes in the private sector. The real value of considering run-on, is challenged by the lack of governance. Consolidation is an immature area compared with buy-out – but that’s because schemes don’t know how to run-off. The platforms are no longer burning , but they smoulder.
DB getting in the way?
Pete Smith pointed out that DB schemes were an obstacle to companies involving themselves in merger and acquisition,
Webster asked if consultancies are moving into corporate finance, Pete Smith said that consultants were evolving and not revolving.
Eric Lambert argued that insurance companies provide a better covenant than private sponsors, A lot of heads in the room shook there (including mine).
Webster came back on this with some ballsystuff about balancing a range of interests (and not just paying pensions).
“Buying insurance is a value destroying action”,
The purpose of solvency II is to protect the “sclerotic” insurance industry; he called it a pricing strategy rather than a pension strategy. He drew a big round of applause for this (imitated by Denise Le Gal).
TPR in attendance
Neil Bull of the Pensions Regulator asked about the strategic asset allocations of schemes in run on (with particular reference to illiquids). He referenced his forthcoming speech the following day.
Consultants and illiquids
The next insight from Elaine Torry was the longer the time horizon of the DB pension , the greater the opportunity for illiquids. Denise Le Gal, perhaps thinking of the BT scheme, mentioned that DB schemes are still smarting from the illiquidity crisis of 2022 (putting schemes off). Pete Smith pointed out that holding illiquid assets did not go down well with insurers looking to buyout or “into” the DB scheme.
The secondary market for illiquids is out there for LGPS, because many corporate DB schemes are forced sellers (not least by insurers).
What is risk?
Pedro Pardo asked “what is risk” and William Bourne said that for LGPS – risk was inflation and the damage it could do. Denise Le Gal pointed out the gilts crisis made it clear once and for all that gilts are not risk free and that minimising risks at all cost failed.
“How do you determine a risk budget and has it changed over time?” asked Webster. Torry said that mature pensions are more interested in credit risk and cash management to meet liabilities.
We heard several times that volatility should not be the sole measure of risk and certain sacred cows were if not slayed, certainly given a healthy poke“Are stochastic models any use to work out risk? “, asked Bourne. “If risk is changing , are the measures adjusting to meet the change”.
More today from Chris Sier
If Smith and Terry think they have escaped the wringer , they should think twice!
Today we will hear from Chris Sier who will ask whether consultants should be regulated. As schemes are required to take advice, it is certain to be a lively debate
What followed was a beer and a continuation of the debate over a very nice supper
