As DB goes into decline, the actuarial industry is being forced to ask itself difficult questions about the role of an actuary and where the profession is heading. Andrew Sheen reports
However, as defined contribution (DC) takes over, Huw Wynne-Griffith, the recently retired senior partner and a founding member of UK actuarial firm Barnett Waddingham, said that in the 'traditional' sense, the future for actuaries working solely on DB schemes looked insecure. "That 'traditional' role doesn't exist in DC. However, there are a lot of things actuaries can do for DC schemes - although not as many as on the DB side and they are different. Actuaries are well trained pension professionals, and that allows them the freedom to feel they can advise on a number of areas in DC schemes."
Nonetheless, Jeremy Dell, partner at Lane Clark & Peacock (LCP), was upbeat about the future for actuaries: "There's a desperate need for innovation [in the DC space], there are very few good ideas coming through." He added the majority of ideas and practices were about 20 years old.
Andrew Slater, an actuary with the BrightonRock Group, agreed with this point of view, stating: "There has to be further innovation." Slater continued: "There's a shift going on from DB to DC. I hope it doesn't get too great [because] DC is an appalling form of pension. Even if it continues there's lots of scope for improvement and innovation and there's no reason why actuaries shouldn't be involved."
Diversification is key
One of the key themes that has emerged recently is the need for actuaries to broaden out and diversify their activities to offset the decline of the 'traditional' DB scheme actuary. Andrew Cheseldine, a senior consultant with Hewitt Associates, said while opportunities for actuaries in the DB space were "dwindling", other areas were increasing: "The actuaries themselves are often over or mis-qualified for the work. But the consultants are qualified for so much more [such as HR, investment consultancy, asset management] - it's how all those interact."
Archibald agreed the future could be bright: "There are lots of additional areas [for us to move into], which has the potential to be rather liberating. A good actuary can add value across the whole retirement space, what we call 'the Big R' and we absolutely see that as an opportunity for growth."
Indeed, Cheseldine said the industry possibly risked a lack of talent: "There are fewer actuaries coming in from the bottom end. It's possible that in five to ten years' time there won't be enough [of them] to go round." Dell said it was possible for the industry to shift focus into the risk management market: "I think that one possibility for the future for pension actuaries is to broaden their skills out to risk management - going into companies and quantifying the risks in their day to day operations. We just need to be alive to the possibilities and aware of that market - actuaries are uniquely qualified to do these things."
Cheseldine agreed with these sentiments: "While there is less need for [scheme] actuaries, there's just as much need for actuarial consultants. It's an approach that will continue. There will always be innovation."
As an example, Dell said the so-called 'Big Three' consultants of Hewitt, Mercer and Watson Wyatt had started to focus on HR consulting - which needed less 'traditional' actuarial skills. That would create a new market for actuaries, he added. Cheseldine said the 'Big Three' had a large share of the top end of the market in the UK and US - the household names of the FTSE 100 and Fortune 500. But for the UK at least, this produced a curious quirk. He said that of the entire UK economy, around 0.36% of businesses employed 55% of the workforce, which equated to 4,415 employers and around half of those were with the Big Three.
He explained: "As a whole, it's a tiny minority of employers but probably the majority of employees. The rest go to smaller consultancies, but both markets are equally important." Dell said the market was, in a sense, dominated by the Big Three but added, "the market is big." He also said he felt the market was increasingly looking for "more nimble, less constrained advisers" who were "able to innovate and add value".
Andrew Slater was dismissive of the importance of the Big Three and didn't feel it was a cause of concern: "I don't think the so-called 'second tier' firms have much to worry about. They may be smaller but they are no less profitable." He continued: "There's plenty of room in the market for everyone. There aren't any signs the market is getting saturated or stale."
Lucas Vermeulen, managing director at ORTEC in the Netherlands, said he felt market forces would act as the pressure valve against a concentration of power in any one area: "I think it's not healthy if only a few actuarial consultants dictate what's going on in the large part of the pensions industry. If the market feels there's an oligopoly forming it will start to look for alternatives. In which case there will be [room for smaller players]."
Possibly one of the largest - and most contentious - growth areas for the actuarial profession is the rise of the 'implemented consultant' or 'fiduciary manager'. Although the two terms carry slightly different connotations, they share many of the same elements, not least the actuarial involvement in schemes.
Vermeulen noted: "In the Netherlands, we've see the move to fiduciary management, which is very similar to what others know as implemented consulting. Actuaries are beginning to compete with investment managers." Wynne-Griffith said the sector was "fraught with conflicts of interest", but Slater countered there were conflicts of interest "in everyday life".
Slater said the most obvious potential conflict of interest for consultants acting as fiduciary managers was the question of whether they recommend their own services over others. Cheseldine agreed: "We generally believe we can add value [but] no matter, what you do there will be conflicts of interest. You've got to have a robust process for dealing with that and making sure you act in the best interests of members."
BrightonRock's Slater continued: "There is a less obvious conflict, which is the resource allocation within the consultancy. How do you deploy or balance people between the consultancy [side] and the fiduciary management [side]?" Unsurprisingly, the view of the implemented consulting model was sharply divided between those who were active in the space and those who were not.
Hewitt's Cheseldine said implemented consulting was "a good thing from our point of view", but admitted "clearly we're biased". He continued: "It's a question of aligning our interests with clients. It makes it less likely that members will be kept in a moribund, under-performing fund paying excessive fees." Vermeulen said: "I was always intrigued as to why schemes should go to an actuary for investment advice. It's like going to a butcher for bread. But one reason for doing it is that the scheme actuaries know the assets and liabilities of the fund."
Wynne-Griffith criticised the model. He said at trustee board meetings he had sat in on, actuaries from the same company as the investment consultant "never quizzed the investment consultant about their actions". "If they both come from the same firm, [questioning] isn't going to happen. I see no real need for them both to come from the same firm," he noted. Vermeulen agreed: "As a trustee, you must find a way to see if the investment process is in your best interests. There is a need or a role for a truly independent adviser. Possibly one outside of the process."
Slater disagreed: "It's a simple analogy perhaps, but fiduciary management is aiming towards being like a fully qualified co-pilot of an aeroplane. It works for big and small schemes, [in fact] even better for small schemes. It gives them access to better governance and asset management."
Vermeulen said: "The difference between actuaries and the asset manager has become very vague [and] if this trend continues, it'll be increasingly different to distinguish between the two." Wynne-Griffith concluded: "I often speak to recently qualified actuaries and invariably one of the questions that comes up is, 'With the decline of DB schemes, what can we do?' I say, 'You're young, you're bright and financially numerate. Go out there and find something to do. There are huge opportunities out there.'"
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