| Compliance debate reaches pension consultants |
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| 03/07/2005 | |
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Pension consultants, long subject to less scrutiny than fund managers, are now being targeted for their opacity. A few weeks after the Securities and Exchange Commission released a report on potential and real conflicts of interests among pension consultants, CalPERS, one of the largest pension scheme in the world, adopted a specific policy in a bid to get more disclosure from its consultants. In a sweeping review of pension consulting practices in the US, which resemble some of the British and European ones, the SEC report identified numerous potential conflicts of interests among a group of 24 pension consultants, including Watson Wyatt, Russell, Wilshire Associates and Mercer, making up over 75% of the US market. The financial regulator found numerous situations likely to harm the advisee's best interest, enough to state that "some pension consultants appear to have erroneously concluded that they are not fiduciaries to their clients." Most conflicts of interests stem from the bundling of various services together, among which brokerage and conference services. The SEC observed that a majority of the pension consultants have affiliated broker-dealers or relationships with unaffiliated broker-dealers that may provide a mechanism for fund managers to compensate pension consultants. However, the broker may not always be the best suited to the client's needs, infringing on the fiduciary responsibility of the consultant. On top of those findings, the SEC said that many pension consultants do not adequately disclose material conflicts of interest arising from these practices to their clients. Two-sided reactions This has prompted reaction both from pension schemes and some of their consultants. CalPERS, the $180bn California public employee scheme, published a policy that requires its current consultants to identify any future circumstances that may create actual, potential or perceived conflict of interests prior to providing advice on a specific subject or investment, in line with the SEC's recommendation. Consultant seeking to do business with CalPERS will also be subject to the same policy as part of the bidding process. "This policy is designed to ensure that CalPERS investment advisors are giving advice that is solely in the interest of CalPERS members and beneficiaries and is not influenced by the advisors' own financial interests," said Rob Feckner, president of the CalPERS Board. "It will help us identify future problems and provide tremendous confidence to our members and the public that investment advice adheres to the highest standards." Until the new policy is implemented, the pension fund will keep relying on Statement of Economic Interests disclosures as well as SEC filings and disclosures during the contract process by its 28 consultants for its various investment portfolios. On the consultant side, the Russell Investment Group took the initiative to start providing its US consulting clients with a document identifying its potential conflict of interest, as expected by the SEC. Under pressure Although regulators throughout Europe have not moved yet on this issue, conflicts of interests of the same order are also likely in Europe, where most consulting businesses supplement the income from the provision of independent advice with other sources of revenue, among which conferences and research for fund managers. Large pension consultants have so far refrained from changing anything to their consulting operations in Europe regarding the opacity of their relationship with broker-dealer, but have already made changes to some of their services. Watson Wyatt decided to terminate its conferences and research programme for fund managers, who would pay to attend the debates and receive specialist research, in a so-called "pay-to-play" arrangement. This type of arrangement has raised concerns about whether some fund managers were using the scheme to enhance their relationship with the consultant and reap investment mandates for this very reason. Watson Wyatt has replaced those paid-for conferences by a series of free meetings and debates. Mercer Investment Consulting, Watson's closest rival, had made a similar decision back in November 2004 as it sought to defuse any ticking bomb in the aftermath of the legal action launched by New York state attorney general Eliot Spitzer against its owner, Marsh & McLennan. Fund managers had to pay an annual fee of about $60.000 to take part in Mercer's conferences. Those new regulatory pressures come at a time when pension consultants have been harshly criticised for their poor advice, being partly blamed for deficits of many schemes in the US and the UK. Some pension funds are now even seeking advice relative to the selection of their own investment consultant, as well as the measurement of the consultant's performance, which was advocated in both the Myners Report. In turn, services such as Pension Adviser Review, which cater to pension schemes seeking "advice on advisers" have sprung up. However, in the UK, the FSA has not investigated yet the issue as deeply as the SEC did in its own review. J.L. |
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