Pension funds pick and choose
PGB, the Dutch pension fund for the printing industry and media, has used KAS Bank as its custodian for a long time now, says Henk Folkers, manager of finance and control at the fund. But the fund will be reviewing the appointment in the near future, he adds.
KAS Bank conducts securities lending for the fund, as well as a playing a role in settlement and reclaiming tax, says Folkers. But the custodian does not undertake performance measurement. “We do that in-house,” he says.
Extra services offered by custodians can be useful, but not all of them are. “It depends which services we are talking about,” he says. “For example with performance measurement, we have several asset categories that are not quoted on exchanges and we have information about those in house. So it’s easier to do that in-house.”
“All the services we want from a custodian, KAS Bank has,” he says.
In PGB’s case, the custodian is also the house bank for the pension fund. This is convenient, says Folkers, although it does leave the fund in a situation where it cannot really be sure what the impact would be were it to divide these services between providers.
However, because the fund buys a complete service from the bank, it does get a good price for this, he says.
Securities lending has become a more significant service for PGB, he says. “It wasn’t important, but it is more so now as a result of relative performance.”
The Netherlands pension fund for agricultural and foodstuffs industry, Bpf AVH, also uses KAS Bank as its custodian. Pension fund manager Erik Martens says the fund has used KAS Bank now for around three years, and is set to review the choice of custodian every five years.
Martens says that KAS Bank provides various services for Bpf AVH – performance measurement,
quarterly reporting and US dollar hedging.
The fund is not concerned about possible conflicts of interest if it were to use an asset manager linked to the custodian. Martens says the fund does not deliberately avoid using managers connected with KAS Bank, and does not believe that would create a conflict.
Although the fund has another two years before its routine review, there is no particular reluctance to switch from one custodian to another that proved to be a better choice. “I think it is not complicated to change,” says Martens. Choosing a custodian is simply a matter of comparing several custodians and looking for the best service and price, he says.
Some pension funds do not use the services of an external custodian at all, and it is not just the smaller of Europe’s pension funds that choose this route. Eddie Dahlberg, managing director of the E720m Volvo pension fund in Sweden says his fund does not have a custodian.
“We’ve tried it, but it didn’t add much value,” he says. Mostly, he says, the Volvo pension fund invests in funds, and those funds carry out the securities lending. This has the effect of reducing fees.
However, Dahlberg admits that the market for custodians in Sweden is different from that elsewhere in Europe. “Because you do get parts of the custodial services from your house bank,” he says. Although the house bank would not undertake securities lending on behalf of a customer, the majority of investment managers would do this.
The Schindler Pensionskasse in Switzerland has used a custodian since 1999, says Mario Passerini, director and pension fund manager. The custodian is Credit Suisse.
The Schindler fund is happy with the service Credit Suisse is providing and so it is not reviewing its choice of custodian, says Passerini. “As an additional service, we have tailor-made reporting, and we use a controlling tool,” he says.
Credit Suisse is one of the many financial institutions that offers both custodian services as well as investment management. But the division that the institution keeps between those two operations satisfies the Schindler fund that there is no conflict. “As they have a Chinese wall between the custodian services and the asset management, the CSAM is also one of our asset managers,” says Passerini.
Changing custodians would be a very complicated thing for a pension fund to do, and should therefore be avoided unless necessary, he says. “As long as a pension fund is satisfied with the performance of his custodian, there should be no change,” he says.