Declining investment returns and peer performance tales are forcing pension funds to scrutinise yields on all classes of assets and to minimise administrative costs.

Cash is receiving greater focus as an asset class in its own right, as opposed to simply a source of liquidity and a means of settling day-to-day liabilities.

In response to market pressures to outsource generic administrative functions from funds'/fund managers' back offices, custodians are rapidly expanding their role from stock warehouses to information warehouses. Custodians have always been required to provide basic cash management in the form of multi-currency cash settlement accounts and efficient payments services. The basics should also include competitive interest rates across the range of currencies, and the ability to sweep and concentrate balances n the same currencies to generate marketable deposits and hence improve the yields.

In the new environment, custodians are expected to be more proactive. As a starting point they should use the information on their stock and cash accounting systems to electronically deliver timely and accurate reports on the client's integrated stock and cash positions. By overlaying on these daily reports stored data on future settlements and income events, the custodian can provide cash forecasts which will generate multi-currency cash ladders, armed with which the cli-ent is able to actively manage its cash and FX exposures.

BCCI and Barings have reinforced the message that cash management is about managing credit risk as much as the absolute yield. Strongly capitalised institutions will almost invariably pay less for deposits than institutions with less capital and weaker credit ratings. However the cost of administering a credit policy and transaction costs involved in higher rates around the market often make this type of cash management an unattractive option for individual pension funds. Custodians are now increasingly offering credit management services, where they place funds into the market in accordance with clients' pre-determined credit policies. An alternative solution which many custodians offer is to provide access to in-house or external cash or money market funds. Clients should pay particular attention to the terms of these funds - AAA rated, highly liquid funds don't generally offer very exciting yields, while those funds offering yield enhancement generally achieve it by trading off credit and liquidity risks.

Mark Andrews is head of cash management and reporting at Midland Securities Services