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The Actuary The magazine of the Institute & Faculty of Actuaries

Planning for decline?

aving spent an average of six years gaining a professional qualification, it would seem reasonable to expect to enjoy a degree of job security. It is a troubling thought, therefore, that, despite the current deluge of work, the demand for the services of actuarial pensions consultants may decline as the liabilities of closed defined benefit (DB) schemes run off.
I should like to give an overview of the options open to consultants who may be concerned about the future, beginning with a cursory look at the viability of leaving the industry or switching to other practice lines. My main focus, however, is an examination of the strategies of the major global players, such as Mercer, Hewitt, Watson Wyatt, and Towers Perrin, in the hope of gaining an insight into the skills and expertise you are likely to need to thrive, or even just to survive, as these businesses evolve. In particular, I shall look at opportunities that the current growth in corporate work may present, as exemplified by the dramatic recent growth of KPMG’s pensions practice.

Starting all over again?
Unless you are lucky enough to already be more than halfway through your career and looking forward to drawing a generous final salary pension at 60, you may well have toyed with the idea of doing something different. There are largely unrelated business areas where you might make use of your experience. For example, your consulting skills and analytical mind may make you attractive to a management consultancy. Alternatively, your financial and risk management expertise might, with enough persistence or luck, secure you an interview with a range of financial institutions. However, the further away from your current field of expertise you stray, the harder it will be to get your foot in the door and the bigger the step back in pay and seniority you are likely to have to take.
It is possible to change industry but not profession by making the switch to insurance. Although demand for actuarial talent is still tiny in health, and the life sector has its own problems, General insurance is certainly a growing area when it comes to the use of actuarial talent. However, general insurers’ appetite for retraining pensions actuaries has diminished as their direct graduate intake has risen, so it is now unusual for someone to move over post-qualification.

Crossing practice lines
You might not need to leave the industry, or even your current employer, for a change of direction. Within the consultancies themselves, three popular destinations for those seeking to escape DB decline are investment consulting, international benefits, and, to a lesser extent, reward.
Investment is appealing, not just because it sounds sexier than pensions, but also because it allows you to apply your knowledge of liability structures while acquiring new expertise in structuring the assets to match them. Crucially, occupational defined contribution (DC) schemes will still have assets to invest even if there is no requirement for an actuarial valuation. The possibility of moves to the lucrative worlds of investment banking and fund management only adds to the attraction.

Going international
International benefits consulting, by contrast, focused as it is on the pensions and reward needs of multinationals, is more of a change of focus than of discipline. It involves dealing with many of the same areas but at a broader, more strategic level and is much less dependent on what happens to DB in the UK. As John Manion, a senior principal within Towers Perrin’s global consulting group, puts it, ‘when you are advising a company across multiple jurisdictions issues that might not appear important at the domestic consulting level often become more complex, so the role for consultants who can effectively take a global perspective is expanding as fast as the number of multinationals and their global aspirations’.
Most people seeking this kind of move will make an application to their own firm’s team. The problem here can be that if you are valued in your current role your managers will not want to let you go and, if you are not, the other practice might not want you. There is also the danger that if you apply and fail to make the move your current team will question your commitment. Consequently, we often see the counter-intuitive phenomenon of consultancies exchanging practice-jumping UK retirement consultants when an internal move would appear simpler.

Change from within
There is less reason to consider a move away from mainstream benefits consulting if the mainstream adapts and you adapt with it. Looking at the major consultancies in the UK the trend is towards pursuing a full service strategy. The aim is to service a broader range of their clients’ needs, covering not just retirement and investment but also the entire benefits, reward, and even HR function. Frank Oldham, Mercer’s UK head of retirement, points out that this strategy has been shown to work for them in other parts of the world. In countries where DC has overtaken DB, such as Australia, Mercer has actually been able to grow its business by ‘developing different and bundled products combining the expertise of the various business lines’.
The idea is that as the revenues from DB pensions decline other areas can be expanded to compensate. This theoretically means that if you become client manger across all services, diminishing retirement revenues would not negate your usefulness to your client. Alternatively, if you do not rise to such dizzy heights, you could find yourself gradually moving towards a role that focuses on one or more of these other business lines as the barriers between the practices shift and blur.
There are some differences between the major firms in what constitutes full service. For example, Hewitt Associates is a leading business process outsourcing firm with huge HR outsourcing and even payroll capacities, whereas Mercer is focused more on high-value consulting. Watson Wyatt, by contrast, has a less immediate need to diversify owing to the large size of its clients. As for the smaller consultancies, even if they had the resources to develop this sort of offering, their relatively small clients might not have the appetite for it. With time some may reinvent themselves as specialists in other niches within benefits or investment. Alternatively, they may continue to focus on scheme actuarial work hoping that their small market share will allow them room to grow and maintain revenues.
Now, it is all very well that the business flourishes, but that is not much good to you if you are discarded along with your ‘out of date’ expertise. So what are the skills needed to thrive in this brave new world and how can you go about developing them? Frank Oldham suggests that ‘consultants increasingly need to focus on their strengths and developing their CV of experience with clients. For some this will be around broadening their financial knowledge to understand the client’s business better. For others it will mean developing their relationship management skills to a new level. Either way, it is becoming increasingly important for our consultants to be able to engage effectively, and with presence, among top UK and international business leaders.’ You should be able to engage with ‘business leaders’ not just trustees because, in a post-DB world, clients would be almost exclusively corporate. Not only are most of the broader practice lines aimed at the company, but also DC trustees are unlikely to ‘enjoy’ quite the same power as their DB counterparts. In a corporate environment, without the fallback of legally required scheme actuarial work, consultants will have to justify the value of each project. As a result, project management skills and the ability to spot and exploit commercial opportunity become crucial.

Corporate opportunity
Ironically, the very forces that are hastening the decline of DB offer consultants the chance to develop these skills. As liabilities have risen and pensions obligations have become more binding for scheme sponsors their need for separate, unconflicted advice has risen. This opens up possibilities for exposure to wider financial work than pensions actuaries have traditionally dealt with. For instance, Mercer has been particularly successful in winning corporate appointments in conjunction with its sister company Kroll, a forensic accountants and corporate recovery specialist. This is an area where Watson Wyatt’s historical success may work against it. As incumbent scheme actuaries to more than a third of the FTSE-100 they have more to lose than anyone if they are unable to deal with conflicts in-house to their clients’ satisfaction.
The upsurge in corporate work has also created opportunity for the major accounting firms to expand their presence in the pensions market. Not only does the current environment heighten demand for their traditional strengths, the pensions aspect of mergers and acquisitions and audit, but they are also in a position to offer a full service solution from a finance perspective. By bringing in their corporate finance, transaction services, corporate recovery, and tax experts they aim to deal with pension risk in the overall context. As Jeff Hunt, the partner heading KPMG’s London pensions practice, puts it ‘KPMG focuses on commercial solutions. We work with our clients to understand their wider business strategy and priorities. We then seek pensions solutions that complement and fit in with these wider strategic plans.’ Considering that KPMG has quadrupled the size of its team in barely two years, with morale reportedly as high as profits, the strategy seems to be working.
There is also the possibility of branching out into more finance-orientated lines than are likely to be available within the benefits consultancies. Linda Bithray, a manager within KPMG, comments that ‘in the longer term actuaries at KPMG should be ideally placed to develop into other areas because of our wider business understanding and a wealth of opportunities throughout the firm’.

Managing your career
If you are working as an actuarial pensions consultant, then the opportunities to develop skills and expertise likely to be viable post-DB may well exist within your current employer. That does not mean that these opportunities will be made available to you without a struggle or that your own firm’s strategy will suit your talents and ambitions.