Vanguard prepares for the inevitable
From its headquarters in Valley Forge Pennsylvania, the Vanguard group currently manages $140bn in corporate retirement plans and other institutional accounts. Among its US clients are Michelin, Bayer and Philips. Now, with plans to capture a large slice of the European market, it has set up shop in Brussels to market its brand of high-tech/high quality/low cost products.
Three equity index funds (S&P 500, MSCI Europe and MSCI Global) and a cash fund have been set up as Dublin Ucits. They are pitched as broad international components of single-country or multi-country pension funds.
Accounting and transfer agency for Europe will be handled, at least for now, by Chase in Dublin. European director Frank Satterthwaite comments: Our intention is to deliver low cost and top class admin and we're confident that Chase can give us that." But long term, the intention will be to achieve the greatest econ-omies of scale, and if that means taking the administration in-house, that is what the group will do.
Vanguard has a wealth of experience in the US, serving companies and in-dustry associations from five to 125,000 employees. It is initially of-fering index investment products coupled with an in-depth knowledge of retirement education and communication. "We plan to work with cli-ents who utilise our funds to meet their evolving needs. We have a high degree of knowledge of the broad and narrow issues associated with providing retirement plans. "
Satterthwaite believes that the pan-European pension ideal "is not a question of whether, but a question of when. It will not be smooth in the short term because of complications such as administration and taxes. We plan to monitor the administration trends in Europe and see how we can emulate what we do in the US."
In the US on the investment side, indexing is carried out on a proprietary system and Satterthwaite says Vanguard is constantly reinvesting in the systems to ensure the minimum of tracking error. Vanguard has experience of administering defined contribution (DC) and defined benefit plans for a total of 2.5m participants.
It's philosophy is based on "giving the client a higher level of service than most other companies could manage," says Satterthwaite. "By using a provider who is top-notch, the cli-ent's employee gets a high level of ac-cess and information on their account and on related retirement issues. We have telephone personnel who understand the retirement schemes, so with one phone call the member can be fully informed of their pension status."
Additional services being introduc-ed include access to account information via voice recognition systems and the internet. "We also offer guidance on how investors can take advantage of the latest investment options and tax laws, to maximise their returns according to their retirement needs," he says.
This type of service will obviously work best in a DC environment and Vanguard will be anxious to see fund-ed pensions develop before it rolls out its full range. Satterthwaite says, "We strongly believe that DC pensions will emerge in Europe but at different times in various countries. This is due to portability and the possibility of control for the participant and ex-pense consistency for the corporation." And he fully expects to see an in-crease in outsourcing as companies move away from ancillary activities: "The driving force revolves around companies focusing on core capabilities and hiring companies to provide pensions administration at higher levels of service at the same or lower cost."
Vanguard has been approached by a number of multinational clients en-quiring about the possibility of integrating their various European schem-es, "but to date no one has asked us to execute" he says. One of it's new cli-ents is a European banking institution which is utilising Vanguard funds to service multiple pension plans.
Over time, the group expects to gain economies of scale and will reduce its fees, just as it has done consistently in the US. Over the past decade, Vanguard's fees in the US have declined by 30%, while those of its competitors have risen by 20%, despite a six-fold increase in industry assets. Richard Newell"