The complexity of the French pension system has meant that custodians dominate securities services provision. Unlike other European countries where large US custodians dominate, France remains a very Gallic market.
Etienne Deniau, deputy head of investor services, SGSS, says the French market is tough, even for the French custodians. "There are a number of specific pension funds for different industries and also public, private and semi-private funds. Knowing all the rules that apply to investors is difficult," he says.
This complexity is reflected in investment vehicles. In the year to end-2006, investments in funds of alternative funds by French general purpose collective investment schemes rose 55% on the year to
€23m. International equities rose 40% to €122.3m. In total, €1.242bn was in collective investment schemes, up 16.5%.
In December, the operating procedures for OPCIs, a more flexible real estate investment vehicle, were published.
"The OPCI funds are beginning to kick in in the French market," says Deniau. "I think that by the summer we will have seen quite a few being launched."
Antoine Sallé, deputy head of sales and relationship management at Caceis Investor Services, says: "We are equipped to deal with the specific aspects of liability management for these new instruments. Our systems have been programmed to accommodate all subscription periods and to prioritise redemption notice
periods according to need. These systems are secure, efficient and fully compliant with regulatory requirements."
The sheer variety of funds means that pension fund groups need help monitoring the flows into each type of fund to reconcile their investments, says Bernard Blaud, head of institutional investor services at BNP Paribas Securities Services.
"There is a trend towards bulk custody services, which includes the custody itself but also middle office services like fund accounting and portfolio accounting," he says. "Clients need the services that will
provide them with the information they need to present to their management committees. We will not see a return to the provision of just basic custody services anymore."
Blaud says custodians that cannot bulk together all the required services into a single offering will start to struggle in the market. He says BNP Paribas Securities Services' appointment to provide custody, valuation and performance management for Electricité de France, is a good example of this trend. "EDF has a huge portfolio - €50bn - and they came to us because we were the only provider who could offer all of their requirements as a bulk service. This is the way the market is going, and I believe it's a trend that will occur in other European countries as well."
Blaud says the increasing burden of regulation means pension funds have to be more accurate in the way they manage their custody and fund administration.
"This is a reason clients are looking at outsourcing middle office functions such as performance measurement and fund accounting. They need information in as close to real time as possible so they can monitor very accurately what they are doing. This will be the main issue in the next five years. To be as close to getting real time information as possible you really need one middle office provider."
Deniau says SocGen's clients are increasingly requesting commission recapture, transition management and securities lending services. "Securities lending is an emerging area, but it is quite sophisticated because different rules apply to different types of pension funds, be they public, private or semi-private."
The French market is one of the most competitive in Europe, says Deniau, in terms of unit trust funds and the fees custodians charge. SocGen has experienced strong growth on the institutional investor side, with much deal flow coming from private equity and alternative investments.
Another significant trend in the French market, notes Blaud, is the reduction in the number of caisse de retraite (CdR) managers. CdRs are second pillar, pay as you go plans. "Within about two years, I think we will see the number of CdR managers falling from the current 125 to 25 pension fund groups. However, there will still be 125 legal entities so the pension fund groups will need more accurate data and a vision of all of these legal entities. This consolidation is already happening - right now about roughly 10 pension fund groups represent over 70% of the market."