Aon's consulting unit deals with ongoing lawsuit

Aon Investments USA Inc. has had a tough two years.

The Chicago-based investment consulting unit of Aon PLC, London, is dealing with a lawsuit filed in September 2020 by Blue Cross and Blue Shield Association's national employee benefits committee that alleges Aon did not provide adequate investment advice regarding three Structured Alpha hedge funds managed by Allianz Global Investors in which its national retirement trust invested.

The AllianzGI funds incurred high losses in February and March of 2020, causing a loss of about $2 billion to the trust, according to the Blue Cross/Blue Shield lawsuit.

The size of the Blue Cross/Blue Shield retirement trust could not be learned.

Aon's consulting unit also is facing potential litigation from the $75.1 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, over inaccurate investment return calculations.

The Blue Cross/Blue Shield lawsuit was filed in New York District Court on Sept. 16, 2020, and named Aon Investments USA, Aon Hewitt Investment Consulting Inc. and Allianz Global Investors U.S. LLC as defendants, according to the court filing.

The suit alleged that in addition to AllianzGI's role in the investment losses the national trust experienced from the collapse of the hedge funds, Aon also was "to blame" for the loss because it did not "conduct active, ongoing monitoring" of Allianz or "identify any forward-looking risks that could impact performance."

Allianz Global Investors U.S. reached a settlement with Blue Cross/Blue Shield in February regarding its losses. The size of the settlement was not available.

"The (Blue Cross/Blue Shield) litigation in no way compromises our ability to serve clients,'' said Robert Elfinger, a spokesman for Aon Investments USA, in an email.

"In the ordinary course of business, the firm and its subsidiaries are subject to lawsuits and proceedings that arise. We intend to vigorously defend ourselves against these claims," Mr. Elfinger said.

Aon filed litigation on May 17 in New York District Court suing five Blue Cross executives, including Jamey Sharpe, the association's now retired chief investment executive. The lawsuit alleges that Mr. Sharpe encouraged the committee that oversees pension investments to commit more to the Structured Alpha funds.

At one point, the trust's investment in the AllianzGI funds totaled $2.9 billion, the Blue Cross/Blue Shield lawsuit said.

Mr. Sharpe denied Aon's allegations, saying the lawsuit is "baseless."

Aon Investments USA is not the subject of any other litigation about the Allianz Structured Alpha funds, said Steven Voss, senior partner of Aon Investments USA, in an interview.

Aon also faces potential ligation from PennPSERS after an external investigation found that investment reporting figures Aon used for determining the retirement system's annual employer contribution rate increase contained a calculation error that would trigger a higher employee contribution rate.

In its Jan. 31 report to PennPSERS, law firm Womble Bond Dickinson (U.S.) LLP said "in the process of reconciling some prior year asset class composites ... Aon has become aware of data corruption ... This data corruption impacted a few asset class composites in the public markets."

In 2020, PennPSERS' staff discovered inaccurate investment returns for April 2015 following Aon's release of nine-year investment return data.

The retirement board of PennPSERS passed a resolution on May 9 that authorized an external law firm to "assist the office of (the system's) chief counsel in analyzing, pursuing and resolving potential litigation arising from the results of the risk-share calculation error."

The risk-share calculation compares the actual rate of return net of fees to the annual interest rate adopted by the fund's board for the calculation of the normal contribution rate. If the actual investment return net of fees is less than the annual interest rate, by the amount of 1% or more, the employee contribution will increase, a report from Womble said.

Steve Esack, a spokesman for PennPSERS, declined to comment.

Aon's Mr. Elfinger declined to comment on pending litigation.

Despite the potential of more litigation aimed at Aon, the firm's institutional investment consulting clients P&I contacted for this story said they are not contemplating putting Aon on their watchlist or terminating the firm.

"Aon has done a good job regarding investment consulting for us," said Stephen C. Sexauer, chief investment officer of the $16.2 billion San Diego County Employees Retirement Association.

"The team we work with is talented and committed," Mr. Sexauer said, noting "these recent events have not influenced Aon's work for us."

With regard to Blue Cross/Blue Shield's investment losses from the Allianz Structured Alpha funds, the CIO of a large U.S. public pension who requested anonymity, stressed caution when it comes to consultants' advice.

"Aon provided investment advice to Blue Cross and Blue Shield which was accepted. But asset owners also need to do their own deep due diligence on investment recommendations before making an investment," the source said.

The pension fund is an Aon Investments USA client and its board does not plan to make a change at this time, the source said.

Although the asset owners P&I spoke with intend to retain Aon as their consultant, a source from an institutionally oriented consulting firm said: "We're beginning to see search activity from Aon clients as well as resumes from current Aon employees. We really can't speak specifically about whom and which prospects, but there certainly is activity," possibly because of litigation issues.

The source asked not to be named.

Aon Investments USA was the second-largest investment consultant in P&I's annual investment consultants survey with worldwide assets under advisement at $4.14 trillion as of June 30, 2021.

Aon's investment consulting business remains strong, said Stephen Cummings, a senior partner of Aon Investments USA, noting that new client inquiries are coming in as well as new employees, in an interview.

Aon Investments USA experienced attrition of about 60 employees since mid-2020, but has replaced most of those workers, Mr. Voss said.

"We're taking advantage of the Great Resignation," Mr. Voss said, noting that the unit is hiring newly minted college graduates as well people with investment consulting experience.

Messrs. Cummings and Voss said they could not comment on individual investment consulting clients.

Bloomberg contributed to this story.