Few days pass without reports of pension funds’ woes – asset values collapsing, underfunding and increased regulatory and corporate governance requirements being the most common. The upshot of this is that third-party providers such as custodians are offering services aimed at taking basic labour-intensive services from the funds. They are also making use of their data to monitor asset managers and keep trustees and sponsors up to date with the fund’s activities.
At the very simplest, custodians are to be moving further into the back and middle office and some of the burden of reporting and data management is indeed moving away from pension funds. Custodians maintain a ledger of every transaction; pension fund reporting is, at its simplest, a customised combination of these ledgers, which is then handed to the client.
Historically, pension funds have taken data from their custodian and then used it to fill in the blanks in the statement of recommended practice package (SORP), according to Sri Pools, head of institutional fund services at State Street. Custodians are in many instances offering to provide clients with SORP reporting from their own data, in turn taking the burden away from the fund. “It is basically taking the custodian’s reporting one step further than it was,” he says.
The same applies to trustee and board reporting. Finance directors typically get data from the custodian bank to present it to trustees, normally on a quarterly basis. Many custodians have taken responsibility for these reports, arguing that all the client is doing is taking the data, rearranging and formatting it and then publishing it.
Pools cites a client that has drawn up a standard format and asked that it be filled out quarterly. State Street then completes the form, oversees the printing and sends it directly to the trustees. “Again it is just taking the role of the custodian one step further and supplying the trustees directly with data,” he says. “What we are doing is providing everything up to providing the commentary.”
New technology is also allowing pension funds to manage their data and its inputting more efficiently. Pension schemes have to keep their own back office records and have historically done so by taking ledger information and keying it in manually. Many now simply download data rather that having to input it manually. “The intention is to eliminate the duplication of manual processing which the back office is inclined to do,” says Pools.
Mark Austin, a marketing and strategy executive at JP Morgan Investor Services, says most pension funds are finding themselves under extra pressure and are looking to external providers to help them out, not just in terms of services but in education as well. “We’re finding that there is much more openness to expanding existing services to pension schemes,” he says.
Funds have found themselves under pressure to be more transparent in their activities and to understand every aspect of their running costs. “Those two factors are driving pension funds to seek custodians that are able to provide a range of services,” says Benjie Fraser, head of European pensions at the Bank of New York.
“As the custodian holds so much data from the pension fund, it is simply being asked to put that data together in summary form and then present it to the pension fund to help it deal with all the other counterparties,” says Fraser.
Custodians are also offering clients with numerous different pension schemes a pooling service. State Street offers what it calls a Common Investment Fund (CIF) that contains the entire asset pool while maintaining the independence of the constituent funds. At the fund level, the assets look as one but the CIF produces valuations, accountancy and data management for each individual fund. “We are more or less acting as the back office for the client,” says Pools.
Northern Trust, in conjunction with Goldman Sachs and Mercers, has recently announced a cross-border pooling vehicle for multinational pension funds. An offshore vehicle, it is domiciled in Dublin and Northern Trust is considering extending it to Luxembourg. “The idea is to allow cross-border pooling,” says Lucille Knapp, vice president of sales and marketing. “We can do reporting and performance measurement on the pool as well as doing individual reporting for the constituent funds.”
“Pension funds have to cut their costs and so they are looking for ways to pass on responsibility for certain activities. Funds are looking for the people who supply them to help them not just to do the role they used to but to broaden that out. And clearly, on the information side, the custodians, if they have good technology and good data storage, are well equipped to do that,” says Knapp.
At the top end of the pension fund, many plan sponsors and trustees are looking for more detailed information on the activities of their funds and for details about performance attribution. Custodians have responded by opening up access to all the fund’s data and statistics.
Northern Trust, for example, offers an online ‘home page’ that gives an array of available data for trustees to select. Knapp says individuals can design the page so as to provide whatever data they require. Typically, this can be fund performance or a high level overview of the entire pension fund, broken down, say, into asset category.
One relatively new product is transaction cost management, an extension of transaction cost analysis (see page 10). “It’s basically looking at the total supply chain and looking at all the costs and risks involved. It looks at whether you’re getting value out of research and out of brokerage and whether you’re getting value for money out of the back office,” says Austin.

Many of the large custodians have forged relationships with specialist providers. State Street is a majority shareholder in the US-based trading cost consultant Elkins/McSherry. JP Morgan has an agreement with the performance measurement group Plexus and the UK’s Inalytics.
Another consequence of this extra reliance on custodians is that pension funds are more receptive to older additional products. Knapp says a lot of funds are still unaware of many of the revenue-generating opportunities such as securities lending, commission recapture and cash management. “Bit by bit, pension funds are realising they can earn their custody fee by doing it,” she says.
Custodians agree that many of the additional services they are providing have either been around for some time or are the result of manipulating data they possessed all along. Instead the uptake of these services reflects a change in attitude.
But in the last analysis, it is up to a pension fund to decide what it should do itself and what to outsource. Like fund managers and the investment community in general, pension funds need to understand what they can do themselves and what they can ask the custodian to do.