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Custody pricing models set to change

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  • Custody pricing models set to change

[11:00 CEST 07-10] GLOBAL - Pension funds should expect to see a change in the fees paid to custodians and firms delivering associated investor services, according to Northern Trust, because pricing structures no longer reflect the work undertaken.

Mark Austin, head of institutional investment relationship management at Northern Trust, said the traditional fee model is being slowly revamped to accommodate the increased calls for client data and transparency post the Lehman Brother collapse.

At the same time, he said regulatory reforms which require increased data are adding to the demand for information. The introduction of a statement of recommended practice (SORP) on investment fund pricing, for example, means pension boards now need twice as many funds prices as before.

Whereas current custody pricing models require additional charges to cover the increased data delivery on top of managing a pension fund's custody, the future model will be based on the data provided and how that assists a pension fund's strategy.

"The pricing basis on which custody was built has changed. We are not pricing as an industry for SORP or IA157 and everything else that is coming," said Austin. "Increasingly, what we are doing is not directly covered in custody. The future of the business is going to be in reporting, risk management, compliance and other associated services."

He continued: "As pension schemes start to go into full closure to future accrual and they have amassed what they can, it then goes down to a set path. When we get to 2012 and personal accounts, before you know it the assets of the group will start to be taken out of pension schemes, and the asset types will change more rapidly over the next 3-5 years. It will leave pension schemes with a different purchasing power."

The SORP, for example, is just one piece of accounting practice regulation which pension funds now have to adhere to and requires specialist data. Whereas a fund might usually be priced at the mid asset price, under SORP the pension fund has to provide the bid price, essentially doubling the number of daily prices they need to receive on every asset held by the custodian.

Similarly, FA157 - a US requirement - is the basis on which a pension fund prices its assets, to prevent pricing anomalies or self-priced assets from turning up in pension funds, but that again has required custodians to develop a new branch of reporting around how assets are priced.

And when the credit crunch and the financial crisis hit its worst in September last year, pension fund trustees stepped up their need for transparency on trading, the assets held, and the risk management applied to their strategies. That has meant, however, that custodians and investor services firms have had to substantially increase the information delivered and charge additional fees where appropriate to cover the additional workload.

At present, most pension funds pay a fee to custody firms based as a basis point percentage of the total assets. But that model is set to change, suggested Austin, in part to cover today's risk management and data needs and recognises the impact that regulatory reforms will continue to have on pension fund asset management.

"Whereas they are priced on basis points on assets under the old model, we will see things based much more on the non-custody services, to cover the reports and the level of complexity, depending on how frequently they want them. It is going to become a complete misnomer in as much as custody will become a part of what is done for pension funds, because it is just a small part of what they are charged for," added Austin.
   
If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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