When it comes to choosing custodians, Swiss corporate pension funds are a loyal bunch - the local banks such as Credit Suisse, UBS and Pictet tend to dominate. But as Swiss multinational corporations expand further into European and more global markets, the non-Swiss custodians have some reason to be optimistic.
"The Swiss market is mainly served by domestic banks or large US custodians," says Garrick Smith, location head in Zurich for BNP Paribas Securities Services. "BNP Paribas Securities Services is unique in that it can provide more reach than the local players but can also be more local than the US players. We can go to the large pension schemes of a Swiss multinational and offer the same services to each of the subsidiary companies across Europe. The Swiss and US banks can't do this since no one else is on the ground in every capital market providing local accounts, local servicing and ensuring assets are within the local regulatory structure."
According to the Credit Suisse Pension Fund Index at June 30, 2006 pillar two assets managed by Swiss pension funds totalled about CHF580bn (€364.9bn) in the second quarter of 2006, a fall of around CHF13.5bn. Rising interest rates and a less stable market environment were cited as reasons for the fall.
"Switzerland has one of the most established corporate pension fund markets in Europe. Every employer offers schemes to employees and it is a very mature and sophisticated market," says Smith.
Markus Urben, head of relationship management at UBS says around 70-80% of all pension funds in Switzerland have during the past few years changed from using a number of banks for global custody to using just one. Pension funds that have used the same custodians for many years are now reviewing their mandates and "we are seeing quite a few movements in the market".
Global custody as a business has been growing in Switzerland ever since 1985 when a mandatory pension law was passed that required all companies to launch a pension fund unit, he says. These had to be set up as a separate legal entity and not as part of the balance sheet of the corporate. As a result firms hired consultants for advisory and/or custodians with the necessary expertise to administer these assets.
Christian Broger, head of global investment reporting at State Street in Switzerland says the Swiss pension fund market is mature and not very fast growing. "Most of the funds that need custody have appointed a custodian; if you want to win this business, it is very much driven by price concessions."
In order to chip away at the dominance of the local providers, the non-Swiss custodians make great play of their international capabilities. Says Smith: "Many of the corporates in Switzerland are global and they want a standard set up and service delivery for their pension schemes in each European country. We are uniquely positioned to do that because our footprint matches that of the multinational corporates."
Broger says the local custody providers have an advantage in offering services to pure Swiss pension fund clients because they have long-standing relationships with the corporate parent for other financial services. But for the larger corporates that have pension schemes running in other European jurisdictions, the international players have a big advantage over the local Swiss players, he argues. "These are the pension funds State Street targets and we feel we can add a lot of value because we can service them in Switzerland as well as in other countries in Europe where we also have a presence." Many of these funds want to consolidate their assets on a European or global scale and State Street can offer support for asset pooling.
Urben says an emphasis on corporate governance has led to a major requirement by pension funds for as much data as possible so they can follow what is going on with their assets. They need to know what their asset managers are doing with their assets - are they following internal and regulatory guidelines, for example?
UBS offers 60 different reports and provides a high level of customisation for its clients. "Data quality is very important for our clients and we have spent some time in reconciling and gathering data from our data providers to deliver more sophisticated reports to our clients. These services are crucial in attracting clients," he says.
Broger also believes reporting is important in the Swiss market, pointing up that local regulators require "very specific reporting from pension funds". Analytics and performance measurement are important differentiators for custodians in Switzerland. The Swiss custodians are "big players" in this area and have a good range of services in place, he says.
One of the most significant trends in the Swiss market during the past few years has been the establishment of institutional investment funds by corporate pension schemes. "Some of the larger pension funds are focusing on founding their own institutional investment funds, by bringing their assets into a fund wrapper," says Urban. "This has two advantages - they can avoid stamp duty, and these funds are monitored by the Swiss investment funds authority and the pension funds authority, which helps clients feel more secure about their liabilities. Board members of Swiss pension have to guarantee with their own personal wealth that they will cover any financial mistakes or illegal activities. Since the law was introduced about three years ago, there has been much more emphasis on control and monitoring of funds."
Smith says the trend to establish mutual fund structures will "create a new game in terms of who services these fund structures across a wider geographical region".
Pension funds will have to report on assets in these funds in line with the Swiss mutual funds laws as well as with the Swiss pension laws, says Broger. "Custodians, therefore, have to offer the full range of mutual fund services such as local depot bank and fund administration. A mutual fund management company has to be set up as well because that is the legal entity that funds these funds. The traditional custody players can leverage the infrastructure they have in place for retail mutual funds in order to serve their institutional clients that are moving into mutual funds."
The foreign custodians, however, will have to make a large upfront investment to establish the mutual fund companies and the downstream services that are necessary, he says. "This will prevent some of the larger custodians from entering the market. State Street is the only US custodian that is physically present in the Swiss market and we have been here since 1998. Before that, we served our Swiss clients from Germany."
But Broger does not completely rule out a role for international custodians in the Swiss custody market. "I can see the Swiss market getting much more global, not least because the Swiss authorities are very liberal with pension fund rules. There is no mandate that pension funds have to use a local custodian, so assets can be held outside of the country. Therefore, there should be opportunities for the large international custodians, but I think the purely local Swiss funds will always opt for a local player."