Custodians could hold key to success
The success of a business depends on how well it is able to manage the risks that it faces. In the past, risk management has not extended much beyond looking at what directly affects the production and delivery of the business’ goods or services.
Recently, however, multinationals are recognising the impact exposure to pension fund risks could have on their balance sheets. The move around the world towards funding pension arrangements is increasing the amount at risk in pension funds, and the trend towards more international investment increases exposure to market risks in other countries.
Managing pension fund risk requires corporate headquarters, trustees and local management to have timely and accurate information on which to base decisions. In some cases, corporate headquarters has little or no idea about what risks it faces from a global perspective because the reporting it receives is either out of date or inaccurate. Improving the quality of pension fund reporting is one of the reasons a multinational will implement a globally integrated custody strategy.
This strategy involves using a global custodian to collect investment data from each fund around the globe and then provide consistent and accurate reporting on that data in a timely manner. Global custodians are well equipped to offer such a service, and increased demand is driving them to introduce this new range of services.
There are many ways to structure a globally integrated custody strategy. For example, a single global custodian is selected and appointed by all funds around the globe. Another option is for, say, three global custodians to be determined centrally with each fund selecting the one that best suits its individual requirements. Alternatively, each fund could select its own custodian that meets corporate criteria as well as its own requirements. Corporate reporting needs can be met either by obtaining reports from each fund’s custodian or by appointing a master recordkeeper/reporter to consolidate information from around the globe.
The size of the global asset pool, the distribution of assets among the various funds and the location of the funds all have an impact on which structure is the best for a particular multinational. For example, none of the largest global custodians have an operation in Africa, so other options will need to be considered.
Aside from having access to accurate, consistent and timely information, there are many other benefits for funds which are part of a globally integrated custody strategy.
From the fund’s perspective, having a direct relationship with a single global custodian reduces risk. The fund will also be able to access services such as compliance monitoring and performance measurement, enhancing its ability to monitor investment managers. Corporate headquarters will also rest easier knowing that improved risk controls are in place.
Funds will also benefit from reduc-ed fees, improved service standards and better contractual arrangements as a result of being part of a globally integrated custody arrangement that uses the multinational’s name to leverage a better deal. Smaller funds, in particular, gain from this arrangement. Larger funds also benefit from fee reductions and information sharing.
Some multinationals are keen to implement a Euroland pension fund in order to benefit from economies of scale and allow employees to more easily transfer between countries.
Currently regulations do not permit this, but if these barriers are overcome then a globally integrated custody strategy using one global custodian in Euroland will make it easier to implement this type of fund.
While there are obvious benefits from both a corporate and fund perspective in adopting a globally integrated custody strategy, the real challenge the multinational faces is how to successfully structure, implement and maintain it.
To be successful requires the buy-in of each fund’s trustees/management. This will depend on the existing relationship between corporate headquarters and the trustees/management and how well corporate headquarters can sell the benefits of the arrangement. Often the strategy will require a fund to move from its existing custodian when it is happy with the service, fees and contractual arrangements that are in place.
In some cases a separate custodian may not be required, for example where all fund assets are invested in pooled arrangements or solely in treasury bills. The strategy needs to be flexible enough for these differences.
A further complication arises in countries where regulatory requirements restrict which custodians can be appointed. For example, a number of countries in Europe currently only permit local custodians with the required local banking licences to provide a custody service.
Adopting a globally integrated custody strategy is certainly a trend for US-based multinationals, and it is now becoming an issue of interest to chief financial officers of UK and European multinationals. The benefits of enhanced risk management and better information are the key drivers for this trend.
Christine Larmer is global custody consultant withTowers Perrin in London