What's the matter with Merrill?

THE response could hardly have been swifter or more draconian. Chris Erwin, a pensions consultant, had dared question in public the large number of senior staff defections at Merrill Lynch Investment Managers.

Within hours of his comments appearing in print, the goliath of the money management industry had summoned its entire might to force a humiliating climbdown.

It got one. Aon, the consulting firm that employs Erwin, began hastily distancing itself from his remarks. In an agreed statement, Aon said: 'The comments expressed were those of an individual employee and should not be taken to represent the views of Aon Consulting as a whole.'

Even at the best of times, few would have banked on Merrill - the old firm of 'ice maiden' Carol Galley - turning a blind eye to someone pointing out its faults. But these are not the best of times for the company, the biggest pension fund manager in Britain and one of the biggest investment firms in the world.

In fact, times are distinctly unhappy for the group. And Erwin had said out loud what many of the powerful consultants - hugely influential in recommending where pension funds invest their money - had been whispering for weeks.

Was Merrill becoming home to the fastest revolving door in the world of fund management? And, with 14 senior departures in as many weeks, including Anne Richards, head of its core Alpha team, was the group facing terminal disintegration?

Erwin may have been silenced, but an executive from a rival consultancy told Financial Mail: 'The situation at Merrill has been causing concern for all of us. If they don't stabilise things fast, they could be heading into meltdown.'

Last year, the group lost its two most prominent names when Galley and Stephen Zimmerman retired early. In September, Jeffrey Peek, head of the global Merrill business that manages £390bn for investors, quit after being passed over for the top job at its US investment banking parent, Merrill Lynch. Then, ten days ago, Andreas Utermann resigned as global head of equities. The job 'didn't meet his long-term career aspirations', a statement said. Few believed it.

Concerns about the large-scale departures follow Merrill's embarrassing £70m out-of-court settlement with Unilever over its handling of the consumer goods' group pension fund. It still faces the prospect of litigation from other disgruntled pension funds such as the Co-op - which this weekend dumped it as investment manager - as well as Sainsbury and AstraZeneca.

To cap it all, Merrill's Wall Street parent has been targeted by New York State Attorney-General Eliot Spitzer for allowing its analysts to push dotcom shares to investors while they have rubbished them privately.

Pension consultants do not like it at all. They invest for the long term and seek stability. They feel happy only when fund managers who leave are replaced by people of similar stature. 'I think they've been hit hard by these defections,' another senior consultant said. 'They've lost some of their better idea generators and have replaced them with people who have not demonstrated they are of the same calibre. For some funds, this will be the last straw.'

Peter Gibbs, Merrill Lynch Investment Managers' chief operating officer, says the criticisms are unfair. Yes, the company has lost more fund managers than it would want. But, he said, it had added more than £6bn of new investment business so far this year. And it is the investment performance - 'sharply improved' this year - that is the acid test for investors.

He also dismissed suggestions that Merrill had been complacent or that its pulling power for top talent had been damaged. This week, the firm will announce that it has lured Chris Wyllie from rival Schroders and Paul Clifton from pension consultant Watson Wyatt. Three more senior executives are about to sign up.

Clearly, Merrill is an easy target to bash - it's big, it's brash and it's American. But it is also plain that a degree of nervousness remains. Last week, the firm put a new pay and bonus scheme in place in an attempt to ensure that its remaining 300 London-based investment professionals did not jump ship.

But it is certainly not in the clear. As the captains of other huge ships have found, simply holding steady - let alone sailing ahead - in the face of a wave of critical sentiment can be a monumental task.