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The $85 billion IBM Retirement System might be capable of implementing a liability-driven investment program largely on its own, the result of a robust internal team that specializes in fixed-income investing. The same cannot be said for the more quotidian plans, those with $1 or $2 billion in assets, perhaps lead by a CFO or Treasurer who considers the company retirement system to be more burden than benefit. For these plans, consultants are key—as is who represents the established and up-and-coming players in this niche-but-expanding space.
Whether in the United Kingdom, United States, or elsewhere, consultants in the LDI space must offer two distinct but related services: work on a glide path with pension plans just entering the market, and, later on, act as a bridge between internal fund employees, actuary, and investment managers. How they do both, and how they transition from that first order of business to the second, will largely define which consultants succeed in this market. Indeed, this fact—that LDI is such an overwhelming trend that those consultants avoiding it will suffer for their avoidance—may in fact harm capital owners of other types. (Endowments, of course, are a breed all their own, confident of their ability to invest sophisticated portfolios largely on their own. Foundations, although perhaps less confident, also can largely navigate their investments alone. Public pensions, however, are in greater need of aid—especially in America, where governance issues allow fewer employees than their Canadian and Dutch public counterparts—and it is exactly this segment of the market that is losing the help of the Mercer’s of the world.)
A note of caution must be inserted here. The consulting business model is, and has been for some time, under attack from financial pressures. The recent spate of consulting mergers—either the Towers Perrin/Watson Wyatt merger of equals, or the fish-swallowing-the-minnow version with Mercer and Evaluation Associates—as well as the push towards implemented consulting/outsourced-chief-investment-officer as a means to raise revenue, may not necessarily spell good things for the quality of LDI consultant offerings. With this in mind, plan sponsors must remain diligent about their consulting relationships, and ensure that the aforementioned services of planning and bridging remain central.
Mercer: “In a sense, to some degree, pension plans have always had some kind of eye on their liabilities, and so have had some sort of LDI.” So says Mick MMolony, Mercer Investment Consulting’s LDI specialist. He would know—as would the rest of Mersince because the firm has long been a stalwart of LDI advice. As shown in our cover story on the Morgan Stanley pension plan, Mercer, with upwardsf $4.0 trillion in assets under advisement, has mastered the act of bridging different, yet essential, parties within organizations with large defined-benefit plans. In this case, Mercer brought togther “Human Resources, Treasury, Finance, Pension Committee, Consultant, and Acuary,” with the goal of having them “all signed on and implemented in concert,” according to Mercer consultant Steve Case. Having been doing just that since LDI was much- less significant segment of the corporate pension consulting market, few will argue with Mercer’s place in the LDI consulting Establishment.
Towers Watson: Towers Watson is strong nearly everywhere Mercer is strong (and vice versa), according to many industry players, and thus it will come as no surprise to readers that the New York City-based firm also sits solidly within the LDI consulting Establishment. However, like many in the consulting world, Towers Watson has moved into the business of implemented consulng—investment outsourcing, in other wrds—which some industry watchers worry will take attention away from its traditional consulting business. (This concern applies inustry- wide, of course, and not just to Towers Wason.). Yet, with $2.1 trillion in assets under advisement and a relatively small $50 billion in assets under management, this firm will surely continue to be a major player in the LDI consulting world. It just may, like many others, attempt to up-sell that relationship and take control of the assets themselves. Whether this is a positive or negative development for asset owners is a topic for another edition of the magazine, however.
Aon Hewitt: “The precipitous decline in interest rates has put plan sponsors in what is becoming an all too familiar quandary—how do I de-risk given the high costs of doing so today?,” write Ari Jacobs and Matthew Clink, both Aon Hewitt men, in this edition of aiCIO. “With interest rates at all-time lows, logic would suggest delaying any action that would extend the interest-rate duration of the portfolio while bonds are expensive.” Despite this logic, the Chicago-based firm continues to see success with its LDI team. Perhaps the firm amongst the New Establishment that is closest to making the jump to plain-old Establishment—some would surely assert that they are already there—Aon Hewitt’s global reach clearly will make it a player as LDI continues to come to the fore.
Rocaton: Norwalk, Connecticut-based Rocaton, as profiled in this issue’s Consulting Corner section, is a relatively small and employee-owned firm founded in 2002 almost exclusively to help corporate plans navigate LDI. “You need minimum scale to have tools to offer LDI, but rapid and significant growth of the firm will always be in the best interest of shareholders,” says Robin Pellish, the firm’s founder. “Being an employee-owned firm is really a valuable tool for aligning everyone’s interests and eliminating turf battles, getting people to focus on the target.” While some may view the ownership structure as a red herring, it certainly isn’t hurting the firm: Having won the 2010 aiCIO Industry Innovation Award for consulting, as well as the praise of friend and foe, this firm is firmly entrenched in the LDI space—and in the New Establishment of LDI consultants.
Cardano: It’s no surprise that at least one solely European-focused consultant made the New Establishment list this time around, for it is British and European funds that have led the way in demanding solvency management and derivative overlay strategies within their pension schemes. Cardano—which has offices in London and Rotterdam, obvious choices for a firm in their line of work—can be said to be one of the drivers behind this fact. Founded in 2000, the firm has a laser-like focus on pension funding status, the result being a robust LDI and fiduciary management practice. According to sister-publication PLANSPONSOR, the firm works with over 35 European-based pension plans. Look for that number to grow in the future as more funds focus on solvency above all else.
NEPC: Cambridge, Massachusetts-based NEPC, the winner of the 2011 aiCIO Industry Innovation Award for consulting, perhaps gets more media attention for is early-stage focus on risk parity investment strategies tha for it’s touting of LDI. This might be changing. With such a large number of corporate pensions getting ready to migrate from return-seeking assets to liability-matching ones, a firm with the abilities—and reputation—of NEPC is likely to see growth in its business.
Russell Investment Consulting: Tucked up in Seattle, Washington, Russell could easily be forgotten—excfor its the large number of assets under advisement at its decades-long run in the investment consulting space. While focusing on more than LDI, the firm “has been focused on the broader teme of ‘de-risking,” according to Kevin Turner, managing director within the consultant wing of the larger organization. “Within this theme, many corporate defined-benefit clients have been looking to reduce equity over time in favor of LDI solutions to better match their liabilities or, depending on their circumstances, reduce equity in favor of a broader, more diversified mix of return seeking assets including alternatives.” As a result, Russell has a robust LDI consulting business—and a place in aiCIO’s DI consulting New Establishment.