The rise of the 'super' funds

For years consultants and fund managers have been employers of choice in the UK pensions industry, but that will soon end once pension funds achieve the scale of Australian and New Zealand funds. David Rowley reports.

Imagine a scenario where your favourite individual consultants, fiduciary managers, lawyers and independent trustees, start to disappear from public view.

Their wise words would no longer be widely shared, as one by one they take up offers to work in-house at the nation's largest pension funds.

If that sounds fanciful, well then think again. UK pension funds have long lacked the scale to act as employers of choice, largely as most defined benefit funds are on a glide path to extinction and defined contribution (DC) schemes are relatively small and new, but that is changing.

The expansion of in-house teams for the soon-to-be-merged local government pension funds will happen soon, while over the next five to ten years the largest DC master trusts will gain the sort of economies of scale that allow them to cherry-pick their favourite consultants for plum roles with ambitious remits and big budgets.

Paul Battye, chief executive of Moorlands Human Capital, an executive search specialist in global pensions and investment, confirms that large UK pension funds like HSBC, National Grid, RBS and Tesco have already been building up their in-house teams and more growth will follow. "As pressures on fees continues to build, then so will in-house teams," he says.

Such a scenario has already come to pass in Australia and New Zealand, due to the competitive pressure to reduce costs and bring in expertise.

In Australia it is as easy to change your superannuation fund as it is to use a UK comparison website to change your life insurance. An open market puts pressure on costs and fees, but also performance – the differentials between fund performances are widely broadcast in Australia.

The result is a greater reliance on in-house investment teams that obviate some of the professional fees for consultants and which are intended to lead to smarter purchases of investment services.

The Auckland based NZ Super, the country's largest institutional fund, has lured back so many Kiwis from high profile finance roles on Wall Street, the City of London and Hong Kong, that it has no need for an external retained investment consultant.

Australian Super, the AU$90bn (£45bn) Melbourne based monolith, only retains an investment consultant as a reality check for the strategies its 100-strong investment team come up with under their own steam.

There are another 10 funds with assets over £15bn in size in Australia after 22 years of compulsory superannuation contributions. Each of these can afford chief investment officers and investment teams of between 20-100 personnel. As each acquires greater know-how in-house, it becomes gradually less reliant on consultants.

In a shocking move for the industry, in April 2016, the head of investment consultancy at Willis Towers Watson, resigned to take over as chief investment officer of Australia's largest corporate fund Telstra Super, the retirement savings fund for the country's largest telecommunications company.

In late 2015 the head of Jana, another of the big four investment consultants in Australia, left to become the chief investment officer of Sunsuper, the ninth largest super fund. There are even a few high profile (and many low profile) fund managers who have joined the in-house investment teams of superannuation funds.

A curious fact of this shift of talent and expertise is that the large funds have not always had to offer a pay rise to recruit. The appeal of working for them is often the ability to focus on a single large, ambitious project in a not-for-profit organisation. It is the chance to put great resources to work; power greater than the consultant in question has ever wielded before, and it is usually too good to turn down.

Deloitte's Sydney-based head of superannuation Russell Mason predicts more high profile consultants will make the switch.

"It is now seen as prestigious to work for an industry fund as an employee or a trustee unlike 10-15 years ago," he says. "These funds are now seen as sophisticated and interesting places where professionals can do cutting edge work."

Of course, some new recruits will see pay rises and many will have come to expect pay for performance too. So some of the not-for-profit culture of these funds is being challenged by new incentive arrangements.

EY head of superannuation Maree Pallisco points out the reality that some funds are effectively now commercial fund managers, as well as administrators of retirement saving plans. So where basic salaries and no bonuses were the norm at many funds, there is now a steady growth in short and long-term incentives.

The trend is seeing a transition of power, knowledge and street smarts from one side of the industry to another. At a roundtable I chaired in Sydney to discuss the use of option strategies this April, there were several former hedge fund and investment bank high flyers now working in-house for super funds in attendance. Each had a sober and fully blooded approach to what Warren Buffett once called "financial weapons of mass destruction".

Where books such as Why I Left Goldman Sachs and The Big Short tell of naïve pension fund managers over-paying or being mis-advised on such derivatives in the years 2000-2010, the tables would appear to have turned down under.

Emigres
There are a number of ex-UK consultants and fund managers who have not waited for this power shift to happen in their home country and who have emigrated to Australia.

In local parlance, some have become 'rock stars' in this AU$2trn industry, but are unheralded in their home country.

David Neal, who was a UK based consultant with Watson Wyatt, transferred to Australia. In 2007 he was picked as the first chief investment officer of the country's sovereign wealth fund, the Future Fund.

This fund is today the largest single institutional investor in Australia with AU$117 bn of assets. Neal, a West Bromwich Albion supporter, was promoted to chief executive in 2014 and recruits his Melbourne-based team globally, with members recently joining from California, Sweden and Holland.

Consultants evolve
For any concerned consultants reading this article, there are silver linings. All of the big four investment consultants in Australia reported an expansion of headcount in 2015. Their biggest clients might need them less for basic investment advice, but they are using them increasingly for niche services that funds still do not have the scale or appetite to run in-house.

Willis Towers Watson in Australia now positions itself as an extension of its larger clients' investment teams, with notable specialisations in hedge funds and private markets. Its Thinking Ahead Institute also serves as a look-out post for disruption and opportunity.

Mercer too has established specialist teams for dynamic asset allocation, infrastructure, legislation compliance, property, private equity, responsible investment and investment operations. Most of these teams will draw on Mercer's global reach.

Of the two big local consultancies, Jana has a service to help funds acquire and manage directly owned investments. It also has specialist teams working on behavioural finance and post-retirement solutions such as online modelling for members.

Frontier Advisors has expanded its IT department to offer scenario analysis, market data and manager information at the click of a mouse. It has also gained global reach on manager research by teaming up with LCP in the UK and Segal Rogerscasey in the US.

In addition, while few will openly brag about it, all four investment consultants are seeing a growing demand for helping clients meet ever growing compliance burdens.

Other opportunities
This article has focused on the recruitment of investment luminaries to superannuation funds, but there will be opportunities for other types of consultants, for professional trustees and for lawyers.

Such skills are common in the executive teams of super funds, where job titles such as chief executive officers and chief operating officers are normal, but increasingly funds are also hiring heads of advice, compliance, legal, marketing and product. Every few years a new discipline is in-sourced, the current trend being to employ data scientists.

So what are the consequences of this trend? Writing here from Sydney, it is a worrying picture for the smaller funds that are losing access to the advice of the highest-flying consultants. It puts extra pressure on them to think about merging to gain the same sort of economies of scale that is giving their larger competitors such recruitment power.

For the UK, if this scenario comes to pass, the only certainty is large-scale disruption to an industry that has for a long time has only seen new legislation and DB funding deficits as its biggest problems.

• Tweet  
• Facebook  
• LinkedIn  
• Send to  

• Topics
• Industry
• Australia Superannuation
• consultant
• fund management
• Mercer
• Willis Towers Watson