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Special Report

Impact investing


Mercers- funds should scrutinise custodians more

UK- Occupational pension schemes should pay closer attention to custody and the security of their assets according to Mercer Investment Consulting’s response to the latest government consultation document on independent custodians.

“Trustees should pay more attention to the risks inherent in custody arrangements in terms of custodian selection and ongoing monitoring," says Mark Walker, head of the European custody group at Mercers.

"In our experience, few schemes actively monitor their custodians’ service levels or the appropriateness of ongoing custody arrangements. Trustees can also make better use of their custodians to monitor their investment managers' operations.”

Mercers is pushing for best practice guidelines for trustees rather than legislation which it views as inflexible and over-complicated as it has to cater for various types of pension scheme.

The consultant says that, at the very least, trustees should benchmark their custodian’s performance annually and should ensure appropriate risk controls are in place and properly documented.

Walker adds: "the important areas of control are in giving instructions, the adopted method for holding cash and securities, and the reconciliation process between fund managers and custodians, where a clear set of procedures should be agreed."

Mercers also proposes that custody arrangements and responsibilities should be formally documented in contractual arrangements between trustees and fund managers and also in the statement of investment principles, ensuring all parties clearly understand their responsibilities and reporting levels.

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