There has been quite a sea-change in the circumstances facing UK pension funds, some years ago some of the larger global custodians were confidently predicting that only the bigger pension funds, say over £1bn (E1.44bn) in assets, might be able to afford their services. One predicted fate was that these funds would be forced to invest through pooled vehicles and buy their custody services that way.
That was a bum steer indeed. The £50m pension fund sector upwards in the UK has never had it so good when it comes to offers of custody services. Joanne Parker of major custody consultants Thomas Murray says a number of custodians have set their stalls out for the small to medium sized groups.
Northern Trust has been fishing happily in this pond as well as looking to catch much bigger fish, as has Clydesdale and KAS has focused deliberately on the smaller fry, she reckons, where it sees the best opportunities for it.
Now the bigger groups are active here, State Street for one confirms it is interested as is the Bank of New York.
But some may have a hard time to catch up with Northern, which has a significant presence here. It has been particularly successful in the local authority public sector funds, where it now has 27 clients from a standing start in 1996. “These funds are focused on the concept of ‘best value’,” says Jeremy Hester, head of UK business development at Northern Trust, referring to the strict criteria these funds have to use when outsourcing. “That is not just a question of price,” he adds. “But this sector is certainly fee sensitive.”
These public sector funds have moved from balanced, where custody was part of the all-in package, to a multi-asset approach creating an opportunity for custodians, he says. “This has also happened in the corporate sector but these funds were further down the track in moving from balanced to say core-satellite structure. They can see the administrative efficiencies that a global custodian can bring.”
Northern can boast that some two thirds (65%) of its worldwide institutional client base is pension funds.
The fact that its systems are that bit more geared to pensions funds has been the decider in a number of wins, he believes. “People do like our Passport system, as it is easy to use and they like the clarity in the reporting. That has been part of the reason for our success.”
As costs are coming down, more smaller funds than ever are looking at custody. Northern says it has never differentiated on client size. “This is a difference in philosophy.” But he points out: “A £50m fund portfolio, say, will often use asset managers we work with for upwards of 20 other clients, so that portfolio is clearly of interest to us.”
“Maybe a year or two ago, the bigger global custody groups would have turned up their noses at these smaller funds,” says Parker. “They are now saying ‘this is business we are interested in, and as a result adjusting their attitude to things like minimum fees. So it’s no longer, you can join us, but it will cost you £30,000.”
What is causing this more open attitude is hard to put a finger on Parker admits, it could be “a by-product of the fact that times are tough”. Or it may be a recognition that many smaller clients now fit the business model that they can service. “And there is always the hope that they will be come bigger clients over time.”
The end result is that the market is very competitive out there and that more groups are bidding on business that they would not have previously. “It is a very good time for pension funds to be looking for custodians. The big custodians are out there determined to pick up or retain business of any size.”
Also, some of the value added services could be of more interest to a smaller than larger fund, such as investment accounting, she says. “This is something that a smaller fund might be more interested in outsourcing than a larger corporate fund. It is harder to convince a large client than a smaller client of the benefits of this.”