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Special Report

Impact investing


Meeting the need to know

For global custodians, information is the new asset class. Across Europe, pension fund boards and trustees are coming under pressure from sponsors, accountants and regulators to provide greater transparency. To do that they need information, not only about the value of their assets, but how that value was created.

As pension funds are forced to raise their game, so are global custodians. New investment strategies, such as liabilities matching and the associated use of derivatives, are demanding new reporting requirements.

In particular, the growing complexity of pension funds’ investment management has put a premium on consistency, says Richard Warne, head of relationship management at JP Morgan Worldwide Securities Services.

“If you turn the clock back 15 to 20 years you would find pension funds leaving custody of assets to fund managers and receiving their accounting reports,” he says.

“The problem there with multiple managers is that you would receive different reports, with perhaps a different basis of pricing. There would not be consistency. So the pension fund is left with quite a burden of pulling all that together.

“Custodians have been able to take on that burden, and not only create consistent reports but also reconcile back the asset manager’s report. So the fund is not only getting a consistent report but it is identifying why there are differences in reporting.

“These differences could be quite legitimate but there could be other reasons as well. So it creates a greater certainty in the records and the quality of the records.”

The need for consistency was one of the reasons the Royal Mail Pension Plan consolidated an additional £2.2bn (€3.2bn) of assets with JP Morgan in June, he says.

“Pension funds are looking for value in the custody services that are provided to them. One way to assist them is to consolidate as much of the assets with one custodian to strike a better deal and, perhaps equally important, create a consistent level of service.

“One of the challenges that pensions funds face if they have multiple service providers is that there can be lack of consistency in the way the service is delivered. Their own systems will have to cope with multiple feeds, for example. That can increase the cost.”

In the UK, pension fund deficits put an additional responsibility on trustees to count every cent of spending on custodian services. This provides an opportunity for custodians who can offer value for money, Warne says.

“Trustees are very aware of the need for obtaining services that are high quality and good value. We’ve had a number of pension funds with fairly substantial deficits, so in that respect they have to be careful how they spend money and ensure that they get extremely good value out of any money they do spend.

“That’s an area where custodians have been able to pass on the benefits of scale and investments that have been made.”

Along with consistency, pension funds want transparency. They need to be able to look though the numbers and see what is driving them. Custodians have responded to this need, says Warne. “They have looked to move more into performance measurement where they not only look at the value of the assets but at how that value was created or, in some cases, destroyed.

“This helps pension fund trustees in the difficult task of shouldering the burden of regulation that surrounds their duty to protect the interests of the beneficiaries.

“So while safe-keeping remains the core of securities services, what is important now is the ability to deliver information to the pension fund trustees or fund administrators that they can use to perform their duties in an insightful way.”


The pressures bearing down on European pension funds are leading to radical changes in investment strategies, notably liability-matching and in particular liability driven investment (LDI). Pension schemes are now looking for support from global custodians to cope with the consequences of a change in investment strategy, says Mark Austin, senior vice president, responsible for the international asset servicing client relationship management team at Northern Trust.

“The advent of LDI is having a strong impact on the way pension schemes are managed, the investment decisions that trustees make and how custodians are used. In the UK the main impact of FRS 17 is that assets and liabilities of a company pension scheme have to be recognised in the sponsoring company’s balance sheet. “This together with the new FTK rules in the Netherlands is putting much more pressure on the scheme to be able to account for or demonstrate what it is doing to account for any deficit issues.The information and analysis that a custodian can provide can be a major part of this process.”

“As a result, trustees are increasingly looking at custody and related services that can help them support their investment changes. This is where services like transition management and support for over the counter derivatives in LDI type mandates really come into their own. And that is where you will see custodians stepping up to the plate to support pension schemes.”

Custodians will have to move fast to catch up with what pension funds are doing. Austin says. “The knock-on effect is that it is ratcheting up the speed with which new investment techniques, funds and asset classes are being adopted by schemes. It’s gone from push bike to Formula 1 in no time at all.”

The growing complexity of the new investment strategies will compel pension funds to look to custodians for help, he suggests, particularly in the field of reporting. “As pension funds move to manage their funds through greater use of specialist managers, through greater use of techniques like TAA, hedging overlays, and hedge funds of funds, they will get into a situation where consolidating their reporting, consolidating their position and consolidating their performance becomes pretty difficult to do because they are using so many different managers and so many different asset classes and financial instruments.”

Faced with this complexity, pensions scheme managers and their boards now expect securities service providers to handle basic services, freeing them up to oversee investment managers and overall investment strategy.

“Pension schemes are concentrating on appointing the right custody provider to get all those basic services sorted out for them, so they can concentrate on managing their investment managers and setting their overall pensions strategy, ” Austin says.

“A custodian can help in other areas, for example, if a scheme wants to change its investment managers or asset allocation. If you’ve got your custody provider right at the foundation, then this sort of movement is not a difficult thing to do.”


Often a change in investment strategy will lead to a change in securities services provider, he adds. “If you have another child it generally precipitates a review of the car you drive or the house you live in.

“If a pension scheme changes its approach to the investment of the fund quite often it precipitates a conversation about whether the pension scheme is using the right providers to support this. That is where you tend to see transition management go hand in hand with a custody move.”

Pension funds’ demand for information about their schemes has been prompted largely by solvency concerns in the UK and the Netherlands. In the rest of Europe, the demand for information is rather different, says Robert Darmanin, head of European pensions and custody at the Bank of New York. He detects a growing demand from multinational companies for information about the pension schemes of their European and US subsidiaries.

“Multinational companies with subsidiaries based in Europe and North America are now demanding a global overview of their pension arrangements, he says. “There is a desire by the head office to get a global view of their pension arrangements and to understand whether from an asset allocation point or a risk management point of view they are maximising their global purchasing power or their overall risk profile.

“They are saying that they want to be in a position where they can take, say, their UK plan, their Belgian plan, and their the North American plan, and consolidate them for information purposes, bringing the information together one a month or once a quarter. This gives them a sense of how they are structured from an asset allocation point of view, or from a risk profile point of view.

A global overview of asset management arrangements also enables multinationals to spot any duplication of resources, he says. “Multinationals are looking at situations where they have hired a manager in the UK to manage the same type of asset class that someone else is managing in the US and Belgium. They may decide to maximise their global purchasing power by using a single manager.”

European pension funds are demanding other kinds of information from their custodians. Rulings by the European Court of Justice (ECJ) in recent tax discrimination litigation cases have set a precedent to make it possible to claim refunds of tax paid on investments such as withholding tax.

The Bank of New York has now introduced a reporting service to help European clients who want to claim tax refunds

“The process starts with the client telling us that they have it on the best tax advice that they have made certain investments in an EU country where they were taxed at a higher rate than they would have been had they invested in their own market, says Darmann. “Because they are a client of the bank we have access to that information and we can gather it and validate it for them. Usually the validation will take the form of certification of the income paid and the tax paid.”

Darmanin says the service is a good example of how custodians can find business opportunities in the challenges that pension funds and other investors face in the current European tax and legal environment.

“Given the number of customers that we service in the UK and European market place, we get a good insight into the challenges facing clients in their different markets. If we see something like the ECJ issue that is applicable to all our clients then we roll out a service that is available to all of them,” he says.


nother possible issue for pension funds in Europe is class actions. Pension funds and their boards can demand compensation from companies that mislead the market. Currently some 200 class actions are conducted each year, mainly by US investors against US listed companies.

European institutional investors, including pension funds, could be beneficiaries of some of these actions. It has been estimated that institutional investors and pension funds in the UK are foregoing some £4.5bn (€6.6bn) by failing to collect the settlements awarded to the winners of US securities class actions.In the UK there could be pressure on trustees to bring group actions, the UK equivalent of class actions, against UK companies that mislead the stock market.

“We are seeing an increasing likelihood that the concept of a class action will be exported from the US to the European market,” says Darmanin. “Potentially the litigation that we have seen in the US could be taking place either in the UK or in some of the more developed markets of continental Europe, especially the Netherlands which is very much in the forefront of this.”

“We offer a class action service today in the US and we would probably want to offer that to our clients worldwide for any European markets where the concept of a class action could develop,” he says. “We haven’t done it yet, but we are watching the situation closely.”

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