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Managing the custody relationship

Often, pension funds fail to obtain full value from their custodians. Increasingly, custodians are providing value added services and pitching themselves to pension funds. Observers say that pension funds need to understand what services they are getting.
“It’s not unusual for many pension funds to go through the whole process of appointing a custodian without putting in place adequate documentation. It’s all very good to have an agreement with your custodian- but often pension funds don’t have the service level agreements or performance level agreements required to ensure that the operating framework for the provision of services is clear for all parties,” explains Mark Austin, senior vice president, responsible for the international asset servicing client relationship management team at Northern Trust.
“When you hire someone, you have to think about how you have to think about how you are going to monitor that relationship and you have to put in place a service level agreement and key performance indicators that you are going to stick to,” he argues.
For smaller pension funds, who find monitoring difficult, there are providers to help. UK based Amaces, for example, has an analytical and benchmarking product, CMS, which allows investors to measure and benchmark their custodians, fund administrators, and foreign exchange providers. Clients can benchmark their performance levels against different universes of other investors are well as their own peer group.
Custodians meanwhile are branching out and taking on wider roles. “What you find now is a blurring of activity of what can be regarded as core service versus value added service. What may have been value added services two to five years ago are now core, such as investment accounting, performance measurement, securities lending, etc,” says Alasdair Reid, head of State Street’s asset owner group in northern Europe.
He says that increasingly, State Street is invited to talk to trustee boards about broad investment issues. He also argues that custodians can be a one stop shop. “We’re finding that clients are starting to appreciate the value that comes from one service provider offering all the services. Apart from the significant time clients have to spend on each relationship, there are efficiencies in the flow of information. Once you have captured that source data, then you don’t have to waste time transferring it to other systems.” Pension funds remain unconvinced, with some saying they do not want to put all their eggs in one basket. Ted Hall, managing director at the Bank of New York, dismisses the argument. “You may not want to put all your eggs in one basket, but you can appoint more than one custodian to make sure assets are secure,” he states.
Joergensen at PKA says it comes down to best of breed. “It might be cost efficient to use a custodian for other services, but you still have to find the best provider. We prefer to find the best provider in each of these areas.”
State Street’s Reid argues that technology is key. “Pension funds don’t want things to be over-engineered. They don’t all necessarily want an all singing and all dancing platform. They just want things to be done simply.”

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