Mercer Reevaluates DB Investment Consulting Work for US Public Sector Plans

(October 18, 2010) — Mercer’s investment consulting division has ceased advising US public defined benefit plans, and executives at other investment consulting firms are ready to vie for that business.

“After a comprehensive review of our business and in light of changes in the public fund marketplace, Mercer has made a decision to adjust the focus of our public fund investment consulting advisory work. Mercer will no longer provide investment consulting advisory services to public sector defined benefit pension plans,” the consulting giant said in a statement. “We stand behind the professionalism and integrity of our investment consulting work for the public sector. Having said that, we are always evaluating our business and making prudent business decisions, and risk is certainly one factor that we consider in these decisions.”

Mercer specified that its plan to refocus its investment consulting services only impact public sector defined benefit plans, and do not affect other services that Mercer may be providing to these plans. “Essentially, what’s governing this is a push to establish limits of liability, and a lot of Mercer’s competitors are doing this as well,” commented one industry observer to aiCIO.

The consultancy’s decision to establish limits of liability may have been spurred by it’s $500 million settlement brought by the Alaska Retirement Management Board, following a 30-year actuarial relationship with the scheme. In June, Mercer agreed to settle the suit brought by the Alaska board, which oversees seven state retirement plans with combined assets of roughly $15 billion. The suit blamed Mercer for billions of dollars in unfunded liabilities from 1992 to 2004, which Mercer denied. According to a statement, Mercer concluded that a settlement was in the best interests of the company and its stakeholders for several reasons, including: the uncertainty of the outcome of a jury trial in Juneau, with its high concentration of plan participants; the complex technical nature of the claims; and the fact that the plaintiffs were seeking at least $2.8 billion in damages.

Previously, in May 2009, Mercer paid $45 million to settle charges brought by the $2.1 billion Employees’ Retirement System of the County of Milwaukee, alleging negligence in Mercer’s actuarial consulting work on the cost of a pension benefit option. Again, Mercer denied liability.

In actuarial consulting, it’s possible to place contractual limits on a service provider’s liability. However, the Securities and Exchange Commission guidelines for investment advisors don’t allow similar limits for investment consulting contracts. An industry observer said the decision by Mercer’s investment consulting division is a reflection of risk versus reward and the consultancy may have concluded that the reward did not justify the risk if they were unable to set liability limits.