Small funds 'cry for help'
In the December edition of IPE there was an article contributed by Richard Greensted which closed with the following remark: “From a custody perspective the most worrying trend continues to be the fact that the major custodians are largely ignoring the needs of small and medium-sized pension funds. In their scramble to move up the value chain, they are leaving behind a potentially valuable group of clients that find it increasingly difficult to get the service they require at an economic rate. This constituency might not be the most glamorous, or have the highest profile, but it continues to represent the bulk of what the pension market is all about. Custodians ignore it at their peril”.
A statement that in fact is a “cry for help” for the situation at present where medium and smaller sized European pension funds have been forced into. However the last statement is not true; there are custodians who do not ignore these potential clients and even specialise in servicing this particular group of institutional investors.
The need for a global custodian is in fact more urgent for these pension funds than it is for the large institutions. This special need is not only brought to the market place by the pension funds themselves but by the consultants as well. They have difficulty in finding a custodian who can offer the full range of services expected from a global custodian at a competitive price for this particular group. Mercer investment consulting stated in a seminar last March that they have over £20bn (e33bn) worth of business that custodians are not interested in! The other major consultants operating in the European custody consultancy business hear the same story. A serious issue which should be dealt with within a short period of time.
Are the needs for smaller and medium sized pension funds that different than the large funds? Yes they are. These funds fully rely on the custodian to meet their demands. In practice this will come down to being their middle and back office. Not only offering the core custody services (safekeeping, trade processing and settlements, collection of income, corporate actions, proxy voting and tax reclamation) but also:
p Cash management / treasury;
p Reporting to trustee as well as to regulatory bodies;
p Investment accounting;
p Performance measurement and analysis;
p Compliance monitoring;
p Securities lending;
p Derivatives clearing;
p Contractual tax reclaim;
p Sparring partner.
The trustees and their consultants need to receive reports from one source which enables them to evaluate the past and enables them to take well planned and well-founded funded decisions towards the near and long term future.
Besides offering these services to this neglected group of pension funds, one aspect is always overlooked: the human factor. Custody will always remain a people business and one distinguishing fact of a custodian is that he should relate back to the individual needs of the clients, instead of presenting them with a mass product. This is especially the case for the small and medium-sized pension funds throughout Europe.
There are custodians who offer al these aspects and they are not that hard to find.
But in the pension funds industry there still is a trend towards ‘Bigger is Better’. I want to defy this because the large custodians lay too much emphasis on the fund size of the underlying client. The fund size will be a reflection of the range of services, but more importantly, the quality of services offered. The needs of the medium and smaller funds are different and vary widely. Unless the funds in these groups fit into the package offered by the large custodians, the services offered will not meet the specific needs. The issue of insurance of the client’s assets is one of the main considerations in choosing a large custodian. Insurance is no longer an issue, because securities are either protected by local law or by a trust structure of the custodian. On the cash side there will always be the facility of cash sweeping into a short term investment fund. So concluding we can rephrase the words in brackets at the start of this paragraph into ‘Big can only be better for the biggest’.
If you are a small to medium-sized pension fund you should choose a custodian which will be focused on its core business, being custody and human consultancy on the securities processing side. Your custodian should be a specialist and not try to cross-sell you hundreds of different products. The custodian should focus on your needs and try to fulfil these. These custodians will not be big names and perhaps unfamiliar to the market place at first, but they will be there for the long term relationship. The small and medium-sized pension funds are a force on their own, and they should use their power to their advantage, individual or collectively. Don’t take the present situation for granted….ask our clients.
Ben Kramer is head of sales and acquisition at KAS-Associatie in Amsterdam