The May 8, 2020 letter from the Pension Investment Association of Canada (PIAC) to the Commissioner of the Competition Bureau hit my desk this morning. Thanks to the folks at Benefits and Pension Monitor for catching this one and bringing it to everyone’s attention.
In a nutshell, it seems like PIAC is concerned that the merger of Aon and Willis Towers Watson, which was announced in early March of this year, is going to reduce the competitiveness for actuarial services in Canada. In the letter, PIAC observes that “The availability of impartial, high quality and cost-effective services in these areas is imperative to the sustainability of our members’ plans affecting thousand[s] of Canadians”. It seems that PIAC has no concern about impartial and high-quality services still being available after the merger as the letter focuses only on “…concerns on the part of our members that the competitive market for actuarial services will be dramatically reduced…”.
Now that PIAC has opened the door to this conversation I want to jump right into the room to share my thoughts.
I am glad that PIAC didn’t suggest that actuaries, regardless of where they work, could lack impartiality. As many of my readers know, I am deeply invested in helping members of the Canadian Institute of Actuaries rise to the highest level of professionalism and what I see from my vantage point is that virtually all our members meet a very high bar for their conduct.
For those unaware, members of the CIA have a robust code of conduct to follow. In addition, the CIA recently published guidance on how to address conflicts of interest. The document is a breezy 41 pages because if you can count on anything, you can count on actuaries to be thorough and explore all the angles of a problem. Kidding aside, this is one of our professional’s most valuable trademarks.
I like to think that every actuary will always produce the ‘highest quality’ work. Unfortunately this is an unrealistic goal and is a direct contradiction of what we know about the ‘normal curve’. With that said, barring a few exceptions, I like to think the range of work goes from ‘really good’ to ‘outstanding’ and that plan sponsors and plan administrators are well served. The fact that PIAC isn’t picking a fight here makes me very happy on behalf of our entire profession.
To me, it is interesting that PIAC decided to focus on the discussion on marketplace competition. Long before the Towers and Wyatt merger back in 2009, I heard more than one sponsor of a large pension plan lament the costs they were paying their consultants. When I asked why they wouldn’t look at changing from one large consulting firm to another large firm, the answer was ‘they are all about the same’ and that ‘the costs were about the same too’. There was a resignation that even though there appeared to be competition there was really no point in changing dance partners. So why is PIAC alarmed now when the problem they have identified has been around for decades?
I can’t answer that question but I can tell you that the reality for some time is that the ‘big firms’ have made themselves so big that it is very hard to find new businesses that buy into their value proposition, so the only option is to trade large clients with other big firms. Of course, trading clients doesn’t do much to build their businesses. This means that the easier road to increase shareholder value is cost reductions through mergers. I expect the trend to continue and I have been anticipating for a while that Mercer will acquire Morneau next. Mergers are how firms find new value for shareholders without committing suicide with substantial price increases – which is why PIAC’s view surprises me.
Are fees really the key issue?
I can tell you that fees are not the be-all-and-end-all when choosing an actuarial firm. If it was then I would be rich and retired for at least a decade by now.
When we started ASI in 1998, our target market was sponsors of pension plans with less than $50 million (20+ years later we now have clients ten times that size). We knew that the mega-firms couldn’t deliver the needed services to these ‘smaller plans’ in a responsive and cost-effective manner and we wanted to bring an alternative to the market. In the back of my head there was also an inkling that we might see a day where plan sponsors would hire one actuarial firm for consulting and plan administrators would hire a second actuarial firm for statutory reporting.
Unfortunately, the idea of the sponsor-administrator divide hasn’t seen much traction compared to the desire for ‘one-stop shopping’. Truthfully, it is hard for sponsors and administrators to decide how to divide the pie. Plan administrators and sponsors collectively purchase actuarial, pension administration, legal, investment management, investment consulting, communication consulting and asset custody services. Somewhere in all of it are consultants providing advice on good governance.
A desire to avoid choosing a different provider for every service has led companies to bundle services in one fashion or another. But what goes together? Should investment consulting and investment management be combined with an OCIO product? Should your actuary also be your investment manager, or your pension administrator, or all three? Can one insurance or trust company help you out with both the custody of assets and their investment? I would like to tell you that there is a right answer to these questions. But in truth there isn’t. Every sponsor and administrator has to work out these answers based upon the specifics of their circumstances.
With the Indalex case in 2013, I thought that the bifurcation of duties between plan sponsors and plan administrators might be revisited by companies wearing both hats. However, even today we are still just scratching the surface. This year, I have had conversations with executives of two different publicly traded companies wearing the ‘plan administrator’ hat – they are growing more conscious of the conflicts that can arise when one firm has a hand in everything. As a result, some companies are starting to see the value in having a second set of eyes in managing their pension arrangements. But the sponsor-administrator line isn’t the only option. Financial reporting-pension administration is a reasonable line and one that is more common since Mercer sold its pension administration business to Morneau (and hence my prediction that they will buy it back).
Adding It Up
In the end, I am unconvinced that the Aon-WTW merger will have any material impact on the cost competitiveness of the services available to the members of PIAC and surely competitiveness will not be ‘dramatically reduced’ as they forecast. What I do think is that all plan sponsors and plan administrators should take a another look at how they have bundled the services that they require to see if there is a better combination of providers while at the same time bringing more firms into the competition for their business. Whether PIAC members need an independent consultant to look at how they might want to divide the pie or whether they want to explore ASI’s actuarial and pension administration services I will be happy to take their calls. The fastest way to reach me is to email me at Joe@ActuarialSolutionsInc.com.