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Winners and losers

No-one is expecting the bloodbath on Wall Street to leave them unaffected, but its ramifications will affect different parts of the corporate advisory community in different ways, says John Greenwood

While corporate belt-tightening and the prospect of a prolonged recession are clearly not going to help longterm growth prospects, for those walking around in rose tinted spectacles, it is true to say there will be short-term opportunities. Indeed the immediate needs of some corporate entities are likely to be advice on how to get them out of the worsening pickle that the deteriorating financial markets is putting them into.

“For corporate advisers, the current situation means there will be a lot of demand for their advice,” says Mark Rowlands, business development and marketing director of Axa.

This is a view echoed by one consultant close to the most pressing advisory challenges of the day. Hewitt advises the Lehman Brothers pension scheme and senior consultant Kevin Wesbroom says intermediaries’ advice will never be more valuable than in times such as these. “Clients want to know what is going on and if they want to know badly enough they will pay, so that is the positive side of all this. Having said that, one of the difficulties is the complexity of the issues being faced here. For example, Lehman has 2m derivatives trades that have to be untangled, meaning lots of legal work. Buying shares in lawyers is not a bad idea right now,” says Wesbroom, who also predicts that at least part of Lehman’s pension scheme will be merged into Barclays’ scheme in due course.

But while Wesbroom’s firm may be advising those at the epicentre of the disaster, the aftershocks are likely to extend to all corners of the market, albeit to a lesser degree. “I don’t see any employers removing established pension and other core benefit programmes on account of this,” says Rowlands. “The impact is more likely to be in new joiners, who may be less likely to sign up because they need their cash to pay their bills, and the reining in of costs. Finance directors looking at DC plans may decide to go for an 8 per cent contribution rather than a 10 per cent one, they may move from auto-enrolment to voluntary enrolment and there is also likely to be further pressure on defined benefit.”

Both Wesbroom and Rowlands point out that thousands of trustees will be facing a double digit drop in their funding levels, which in turn will filter through to the balance sheet through FRS17 and an increased Pension Protection Fund levy. “This will accelerate the need for finance directors and trustees to receive advice on their investment strategy and also with how they can deal with the broader picture. This all makes DB look even more toxic to finance directors,” says Rowlands.

The collapse and bail-out of AIG also set tongues wagging about whether the contagion was spreading to insurance companies, leading to most players in the UK issuing statements confirming their exposure to the stricken American insurer, as well as to Lehman Brothers. These have all so far fallen way short of the £1bn mark, with Aegon confirming £211 and Aviva £270 to Lehman directly. Swiss Re says its exposure to AIG is £100m. These figures in themselves are insufficient to cause serious damage to providers operating in the UK, but what nobody knows is where the bad smells will turn up next.

Rowlands says that this could lead to problems for providers who have to raise capital on the markets to fund new business going forward. Adrian Humphreys, managing director of WPA’s corporate division agrees, and believes the year old credit crunch has already taken its toll.

“I think that providers are paying unsustainable levels of commission on big corporate healthcare schemes and that this will come under increasing pressure. The continued turmoil in the financial markets will lead to hardening of premiums at the higher end and yet a softening of prices for the small corporate and private client sector as people find it harder to pay”, says Humphreys.

Humphreys says the economic downturn is already taking its effect on corporate healthcare cover. “We are seeing the numbers of groups that are insured remaining static but already employers are not putting in place cover for employees replacing those who have left through natural wastage.”

The group risk market remains relatively unaffected to date, according to Ron Wheatcroft, technical manager at Swiss Re. “Financial services staff are the typical client for group risk products, but there are 8m lives covered and I do not see that number falling off a cliff overnight,” he says.

But while the group risk sector may be amongst the last to feel the pain, it is clear that tougher times lie ahead. One consolation may be that things will be worse in other sectors.

“In previous times of volatility or recession, the experience of corporate pensions has been robust,” says Rowlands. “I would rather be a corporate adviser than a wealth management adviser right now.”

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