As a profession, actuaries stand accused of negligence on a grand scale," according to The Economist, commenting on the demise of final salary pension schemes (January 26 2006). False precision and reckless approximation are cited as the main reasons why clients' liabilities have grown faster than their assets despite the bull market. There is no recognition that pension consultants may be attempting a mission impossible. After all, their asset-liability modelling, influencing strategic asset allocation and risk assessment, is an inexact science. Its outputs are overly influenced by assumptions on the future paths of factors such as inflation, interest rates, economic growth and life expectancy, all of which determine future market conditions and liability profiles. Any predictions of these factors decay exponentially over time. So big is their subject ive element that three separate models can predict different outcomes for the same pension fund. "Models must be used with care as they can produce misleading outcomes unless used by highly skilled people. They are expensive and some trustees are reluctant to spend enough on their governance budgets," says Peter Murray, associate at BESTrustees. Pension funds that have especially benefited from consultancy advice tend to have good in-house investment expertise providing a reality check. They also ask the right questions because they understand what they need to know. In contrast, the more normal situation is one where lay trustees do not fully understand the limitations of the models they use. Being risk averse, they follow the herd when entering new asset classes. In pursuit of double digit returns, they have become more short-termist; yet many have limited understanding of the underlying investment strategies. "One unsung consulting hot spot is governance: coaching a board on how they should organise their decision making is one of the biggest value-adds of all," says Roger Urwin, global head of investment at Watson Wyatt. Thanks to such coaching, pension funds are increasingly focusing on defining their risk tolerance and liability profiles in order to adopt investment options that immunise various risks and match liabilities in the long term. But the transition to liability-driven investment has not been easy. "As a generalisation, most consultants know more about assets than liabilities. Also the immunisation tools on offer are too technical. "This further complicates the overall worth of asset-liability studies," says Paul E. Owens, the plan manager and chief executive of CAAT Pensions, a Canadian pension scheme.

On the assets side, there are challenges, too. The key one relates to manager selection. For sure, consultants have been honing their instincts on manager selection, risk management and performance measurement with respect to new and old asset classes alike. But spotting genuine talent has been tough. With skills-based strategies, consultants have entered a new world of granularity and transparency; a world in which the boundary line between luck and judgment is as clear as black and white. This applies especially to alternative investments where gains are of zero sum nature and opportunities get arbitraged away as fast as they are discovered. Another challenge applies to consultants' role as gate keepers. Quite often, they shy away from presenting new investment products or approaches when these fall outside the trustees' intellectual and emotional comfort zones, only to hear the trustees lament afterwards that they have missed the best upsides in hedge funds and private equity. Their inability to exploit the prime mover advantage with new investment ideas is often blamed on consultants, who are supposed to fast forward their clients' progress on the learning curve. As a result, consultants now face stiff competition from three sources. The first - and potentially the most potent - is the investment banks, acting as fiduciary consultants and providing one-stop-shop solutions to larger pension funds. Pioneered in the Netherlands, this concept is ripe for export to all the mature pension markets. The second source is multi-manager platforms providing services similar to those from fiduciary consultants but focusing on medium and smaller pension funds. This trend is well established in all markets. The third source is large fund managers who are offering strategic asset allocation services alongside their global tactical asset allocation products. Such managers are forming long term strategic alliances with pension funds and engaging in joint investments.

In their separate ways, each aims to deliver agility on a scale that consultants have hitherto found hard to do. Only time will tell if any of the nascent competitors succeed. One thing is for sure, though: no scenario is credible unless pension funds ramp up their own governance and improve in house expertise.