Gallagher Employee Benefits’ Tim Johnson is on the acquisition trail to multiply turnover fivefold within three years. John Greenwood hears how and why
The world’s seventh largest benefits consultancy by turnover, Arthur J Gallagher is a relative unknown in this country. Gallagher Employee Benefits chief executive Tim Johnson has been charged with changing that. To get there he has a specific target of growing the UK benefits arm’s turnover five-fold within three years. For the consultancies looking for a shelter from the chill wind of commission withdrawal, that could mean a time to do business.
“We are definitely in the market to buy, if the culture is right,” says Johnson. “If the culture fits, give me a call, because we have got a place for you. We have a very efficient profit/reward system and we don’t have to carry any baggage.”
Gallagher EB’s New York Stock Exchange parent has cash to spend – in part courtesy of a balance sheet that looks almost too healthy for the liking of some analysts. So the target has been set and the mission launched. So where is Gallagher heading?
“Global domination. But joking aside we want to be a true alternative to the other major consultancies. Our objective is to be an automatic choice to be used by major employers in the UK and multi-nationals,” says Johnson.
So how is Gallagher going to take business off the big four established global EBCs?
“We are different now because we are more nimble. We will focus on delivery and asking whether the benefits employers have are the right ones. We aren’t afraid to say ‘why are you spending all this money on this benefit when no-one appreciates it’.
“Not having a massive DB is a huge advantage. We don’t have that massive cost overhang, nor do we have that turkeys voting for Christmas issue that some consultancies have when it comes to offloading DB liabilities. We are quite happy to challenge DB liabilities as they need dealing with in the same way other liabilities need dealing with. We believe there is a definite desire from some consultants to maintain the status quo, because otherwise their fees will go. When you have got a massive actuarial practice, what else are you going to do?” he says.
Achieving the scale, reach and reputation of the established players will take some doing given Gallagher EB’s current size. So how is Johnson going to get there and what components is he looking to bolt on?
“We will be making acquisitions to get there. We are fortunate to have a low-geared balance sheet and we have a war chest to achieve this,” says Johnson.
“We buy to integrate and to grow. In the EB space we are looking at the non-trustee firms. Anyone who is a corporate adviser, but not wealth managers. We want DC consulting based firms. We are seeing lots of opportunities in the UK,” he adds.
“But the people we want must be client-focused. If you are pile-it-high, sell-it-fast operation it won’t fit. The Gallagher culture is all about client service. You must love your clients, revere your clients. And if you do, you will get on great with us,” says Johnson, who adds that he is also looking to acquire other types of businesses with the same natural customer, such as those with expertise in HR services, pay consulting, human capital management and communications.
The US parent’s target is to double in size from $0.5bn to $1bn in benefits-only turnover within five years. With that will come more offices in more countries, and an expansion of the footprint in the Far East, the Middle East, Europe, North and South America.
Johnson’s part of that quest for global domination is made that much easier because he is coming to the market at a time when the abolition of commission and auto-enrolment are posing tough financial questions of many in the workplace pensions industry. Johnson believes it is going to be very difficult out there for some corporate IFAs.
“There are already some distressed sales out there and when the OFT and the DWP consultations came out, they hurriedly wanted to get to completion. If we get that drop-dead ‘commission is over from April’, then I think there will be carnage,” he says.
Johnson believes the fallout in the industry is going to be significant.
“I think it is going to be hard. Your regional IFA large firms are still, I suspect, using commission as a subsidy to make ends meet. They have lost transactional investment business since the RDR. If they start to lose clients who used to pay for the services they provide, they are simply going to run out of cash. We are predicting fairly massive fallout.
“I was talking to one provider who was predicting some practices will lose two thirds of their revenue and the average loss will be a third. I think that is high, but I could see between a half and a quarter of firms’ pension revenue being lost, just because employers won’t pay, and because they will lose their commission. That is going to have an impact on the number of advisers and the services provided.
“In the end it will create a better-functioning market, and more realistic pricing. There are still schemes that are paying half a million pounds commission – and there are IFAs who have one massive scheme and use it to cross-subsidise all the others,” he says.
And where does this fallout leave providers’ relationships with intermediaries?
“The relationship is going to change and there is just a lack of interest in dealing from several providers. There is the harsh reality at the heart of providers, added to a very real sense of ‘oh, we haven’t got to pay commission any longer, this is interesting’. I would imagine secretly some of them are lobbying for it.
“No-one seems to have made the link between commission and fees – no-one has said providers need to reduce their fees in proportion to the commission they are making,” he says, adding with amused incredulity, “I have heard a provider say ‘we can’t actually reduce our fees, because of the contractual terms we entered into at the time. We can’t actually break those.’”
While there will be adviser fallout in the short term, the end of commission will, he argues, potentially lead to another round of switching if providers don’t pass on their savings.
“Some providers will pass all or some savings on, but in theory you will have some providers who will have nice fat margins on their pensions, for the first time in a long time. So I predict we will start to see a lot of movement amongst pension providers again. So it won’t be fuelled by churning as it was previously – this time it will be fuelled by economy. And the ones that don’t return the savings to their client will see a mass exodus. If providers are all doing more or less the same thing, the only differentiation members will see will be on cost,” he says.
He thinks it unlikely that the drive towards abolishing commission will be lost. “It is too political a hot potato for it not to be implemented. They can’t consult on it and do nothing, so I believe something is going to happen. Hopefully there will be a soft landing, and a bit of common sense. So if you have a scheme that is considerably lower than the charge cap and they happen to pay commission, then why would you not be allowed to continue with that?
“I agree with a charge cap, but if you have quasi-compulsory pensions, why didn’t you think of capping the charges in the first place?” he says, adding that Gallagher has a handful of schemes where the deferred member pays 0.85 per cent.
“But we have always been a fee-based business, and put the commission in a client account and let them draw on it for services when they want to,” he adds. “But there are firms out there who have no fee agreement, and for whom 95 per cent of their revenue comes from commission.”
But he does not see the end of commission as the end of the world for good advisers.
“We can see the pension commission will be going and we are discounting that. But does that mean quality employers who had their fees offset in the past? No, not always. Core fees for looking after healthcare, risk, onboarding, flex, these are not going to change. If anything these will go up. We are predicting more flex, more innovations, duvet days, flexible working hours, and more solutions like that,” says Johnson.
And will we see Gallagher offering its own pension investment solution in the same way some big EBCs have?
“Mercer are good at investment in terms of how they measure, gauge and check other people’s investment performance. What we will see is whether they can do well at becoming an investment manager. We will not be doing an in house default or range of funds,” he asserts.
He shares Lord Turner’s lack of support for the government’s pot-follows-member proposal. “I am not convinced pot-follows-member will ever be enacted. It is an ill-thought through process. I used to work for a business that was a member of the Transfer Club, which allowed you to transfer between employees within a particular sector. It was a collegiate way of doing pot-follows-member. That worked after a fashion but was hideously inefficient. If you have lots of pots moving around, why have competition between providers at all? I know small pots can be inefficient, but if you have a charge cap, why do you need it? It is admin for no real benefit.
“Providers want to offload them, but why should the member suffer losing a quarter of their fund in charges, when the provider has only got to keep their money invested and give them an electronic statement once a year. That’s not high maintenance – these dormant pots are pretty cheap,” he says.
In November the firm launched its Groupsure SME auto-enrolment solution, in partnership with Scottish Widows, which can offer employers with between two and 100 employees big scheme benefits such as decent free cover limits, healthcare with no medical underwriting, auto-enrolment support and other things small employers will have thought they might not have been able to have in the past.
“We think for full auto-enrolment support small employers are going to pay between £3,000 and £6,000 per annum. There is a debate as to whether the first year needs to be more expensive, or whether you have a flat fee. Smaller employers do not like paying an up front fee so we are planning to spread the cost over a three-year contract.
“Package up what employers want and give it to them in a simple way. I know payroll firms have been coming in here. Their calculations work, but their system does not handle the comms, it does not handle the compliance records. It only solves a bit of the problem.
All about Tim Johnson
Born – Reigate, Surrey, where he still lives with his wife and children
Enjoys – “Fishing, I’m a poor golfer and I like cars”. Owns the oldest surviving Sunbeam Alpine Mark I (1958).
Early career – Photographer
Started in financial services in the 1980s when a friend asked him to help with marketing. “I soon found myself advising – there were no qualifications back then”. Joined Federated Pension Services where he qualified as a chartered accountant and also became an examiner for the CII. Then joined RK Harrison.
1998 – Joined BMS Financial Services. Led the MBO of Risk and Reward out of BMS in 2001 and then ran it as his own business until 2010.
2010 – Became a merger partner with Gallagher. “We were their very first acquisition anywhere outside the US on the EB side. I had several offers on the table and Gallagher were not the most money. But we saw this is an opportunity waiting to happen.”