Rare all-in business
The Danish pension and asset management industries are big enough to offer global custodians some glittering prizes. The mighty ATP, with assets in excess DKK610bn (€82bn) and effectively part of the state pension system, selected BNY Mellon as its global custodian in 2006.
Allan Nedergaard, director at JP Morgan’s Copenhagen office, says his firm won several large mandates in 2010. These include a custody mandate in June for €6.8bn of mutual fund assets from BankInvest, the Danish asset manager, and a €26bn depository mandate from PFA Professionel Forening, Denmark’s second largest private sector pension fund, in July.
After ATP there remain 10-20 tier-one clients, comprising domestic pension funds, insurance companies and asset managers, equal in size to those in other Nordic countries. As elsewhere, understanding this market depends on a grasp of detail.Denmark, for instance, still has its own currency, the krone, pegged to the euro within a currency exchange fluctuation rate but with a central bank lending rate of 1.05%, higher than the euro-zone rate. Consequently, even euro-denominated assets held by Danish investors carry some currency risk which might require hedging by a custodian. “This makes currency trading and hedging a vital capability,” notes Tom Schmidt Jensen, senior vice-president, group trading and investor support, Danske Bank.
Then there is the complex structure of the Danish banking industry. There are 22 licensed deposit banks in Denmark that can act as custodians to retail and institutional investors. In practice these vary enormously in size and capability. As in Sweden, a domestic asset manager selling investment funds to third party domestic investors is obliged to use a local deposit bank as custodian; this bank, however small, may appoint a global custodian for non-domestic assets. “Historically, there have been ties between those entities requiring custody and local banks,” warns Nedergaard. “Many of these ties remain in place.” JP Morgan has a licensed Danish custody bank but none of the other global custodians have taken this step.
Mutual funds marketed by locally licensed Danish asset managers have an approximate AUM value of DKK890bn (€119bn). A large part of these are captive assets managed by bank-owned asset managers with custody banks within the group. The most important example of this, Danske Invest, is part of the Danske Bank Group with Danish AUM of DKK247bn. Other Danish banks with captive assets under custody include Jyske Bank and Sparbank, not to mention the Danish subsidiary of Sweden’s Handelsbank.
Approximately half of assets under management in Danish mutual funds are retail, half institutional. Retail funds have a high exposure to Danish krone denominated bonds, approximately DKK127bn or 25% of all assets under management, and more than DKK16bn in Danish equities. The same data is not disclosed for institutional funds but these funds may include similar or higher allocations to domestic, Danish krone denominated bonds.
There is also a complex system of non-state pension funds and pension insurance companies, some of which carry guaranteed minimum rates of return. Some schemes are employer-specific, some specific to narrowly defined occupational groups and some are industry wide. Detailed data on asset allocation within these funds is hard to find so we have to rely on estimates and company research. “We estimate the asset allocation of the top ten pension funds is 58% in Danish assets of which bonds would be in a sizeable majority,” says Madeleine Senior, head of Northern Trust’s Nordic office in Stockholm.
Market participants agree that pension funds’ domestic bond assets tend to be held to maturity. Domestic equities may or may not be traded actively. This bifurcates the market again. “If an institution holds a domestic portfolio which is not being traded actively then the level of service they require from a custodian may be core and plain vanilla,” says Dorte Kirkelund, head of global transaction services at GTS Bank (Denmark), a subsidiary of Swedbank.
Fees on this type of business are low - as little as 0.03 basis points for both domestic equities and bonds. Neither do portfolios of this kind call for much in the way of reporting. “This helps to explain why there is still an amount of in-house custody taking place,” Kirkelund adds. “We are not commonly asked to provide the full range of services.”
There are many other pension funds but their administrative structure needs to be understood by prospective custodians and other service providers. Due to the multi-tiered nature of the pension system, management is performed at various administrative levels. For instance, the national pension is administered by municipalities under supervision from the ministry of the interior. ATP and the supplementary state pension (SSP) are administered by the ATP, which is legally constituted as a private corporation. Since 2005, it has been possible to switch contributions away from the SSP to private pension providers; this year the switch was made compulsory for new joiners and contributions.
Elsewhere, the ministry of finance manages the civil servants pension scheme for those employed by central government, while local government employees are catered for through a single organisation, Kommunernes Pensionsforsikring.
Occupational pension schemes formed through collective agreements between employers and employees are typically managed by a board that includes employee members. These will make ultimate decisions about the appointment of service providers such as custodians and administrators.
Individual supplementary pensions are separately catered for. Two associations cover private pensions, one for insurers and one for banks. However, many pension schemes share administrative functions with other schemes via separate administration companies where decision taking on choice of custodian may take place.
Success in this market depends on local presence, and the cultivation of local relationships. While some, like JP Morgan, have built a vertically integrated business, their rivals are happier to tie up with local custodians. One example of this is the collaboration between Handelsbanken and Northern Trust.
As in other Nordic markets the chilly wind of change of is being felt in Copenhagen. The introduction of a domestic central clearing platform (CCP) has cut costs. “More CCPs are on their way; price competition will be good for everyone,” adds Kirkelund. Then there is the prospect of rationalisation in the banking and asset management industries. “If this takes place as I expect it will, then we would expect captive assets to go out to open tender,” comments Nedergaard. “We are waiting on a change of culture for this.”