How the chemicals giant broke the mould in Germany by outsourcing in a big way. Fennell Betson reports
It sometimes takes the biggest to bring about a revolution. Chemicals giant Hoechst, with one of the largest pension funds in Germany, did just that when it opted for an independent global custodian for a substantial portion of the DM7.8bn ($4.6bn) assets held in its Pensionskasse.
This was the first time this had been done in Germany, according to Pat-rick Roeder, head of asset management in the pension fund, who spearheaded the move.
The scheme, which covers 71,000 active employees and 31,000 pensioners, comprises a basic system covered by the Pensionskasse and a supplementary arrangement for those over a certain income provided through book reserves on the em-ployer's balance sheet.
The externally managed assets comprise much of the 35% in fixed income and all of the 25% invested in equities. They are invested in a series of Spezialfonds run by a range of Kags (investment management companies) belonging to German banks. Besides the balance of the fixed interest, the 10% in real estate and 30% in mortgages are internally managed by Roeder and his team at Hoechst.
If you choose a German manager's Kag to handle your assets, then the obvious solution is that the bank keeps your assets with another bank. This creates a situation that as your assets grow larger and you have more Spezialfonds managers, you end up with perhaps 10 different managers and 10 different custodians," he says.
"Now you can question if you need 10 different custodians, You select an asset manager because you think they are good at this, you do not choose them because of their good safekeeping capabilities!" And it can result in practical difficulties. "If you want to have an overview as to the full composite picture and you want to consolidate all your assets, it becomes quite difficult, because the reporting from the different custodians varies." The reporting format differs and the prices on currencies and assets can as well. "It is very time-consuming if you are asked by the board what the asset allocation is."
Hoechst felt that it should be able to outsource the book-keeping, reporting and safe-keeping aspects of the portfolio to one specialised bank. "We thought what was common in the US should make sense for our pension fund as well," says Roeder.
He embarked on the search by having a look at the marketplace to see who could deliver what was wanted. They had to fulfil three criteria. "The custodian had to have state-of-the-art technology and this must be user-friendly. Custody must be a core business of the bank to guarantee that it is fully committed to its custody product. We wanted someone who is relatively independent from asset management."
All the contenders were foreign banks - all from the US, in fact. "It would be hard to find someone in Germany, as only Deutsche Bank is really active in global custody business. But as they are also involved in asset management, there would be conflict of interest." The chosen bank was Chase Manhattan.
The whole process was quite lengthy. The original outsourcing decision was taken in 1994, but it took six months to make the selection. Then another half-year went by getting approval from the regulators. So it was last year before the system went live.
"The reason why we did it was not the safe-keeping, which is a commodity business now, but the value-added products of reporting and performance measurement," says Roeder. "We wanted to find a way to improve fund reporting, to make consolidation of our assets easy, and to have the information in a timely way. That was extremely important for us. Before we obtained monthly information and now we have on-line information and so have immediate access to our data for asset allocation purposes and we do not have to call 10 banks."
But as the fund diversifies all over the world, it means that non-German specialist asset managers are being used. "The monitoring of this structure is becoming more complex. The monitoring of these managers becomes more crucial. Monthly information is no longer sufficient. We need it soon-er."
Roeder admits that there were initial teething difficulties. "The major one was the different culture. In the US banks everything is on an electronic basis, but here in Germany, Kags de-pend very much on paper. There were not major problems, just back-office ones. We have overcome these, but the custodian had to learn that they had to adapt to German standards, so they learned from the banks here, and vice versa." But Hoechst has achieved what it wanted. "We are pleased with the service we are getting."
The cost structure is an area where Hoechst was determined to see its ideas take root. "We wanted to have transparency in the fee structure here in Germany, where you pay high commissions, low management fees and nothing for custody. We did not go along with this fee structure. We pay for what we get, so we pay the custodian, we pay commissions - we want to pay low commissions - and we pay higher but 'satisfactory' mangement fees as we believe the manager is taking decisions and should be paid properly." The group ended up not paying more than before, but not less either. The cost of the custody was of minor importance - "custody is not very expensive", he says.
"We were the first to give such a mandate here in Germany, but we are not the only ones to do so." There has been interest from some German companies, but mainly it is from the local subsidiaries of multinational groups as they are more familiar with the concept of custody. But it is not something that all funds need. "If you have most of your assets in German bonds, you do not need a global custodian. But if you have diversified data and you want to consolidate your results, then a global custodian is the obvious solution." His overall comment: "I would do it all again - everything worked!"