Ask Geoff Singleton how the £4.5bn ($7.2bn) Stratchclyde Pension Fund chose its global custodian and he will admit that ultimately it was on price.
But that is to oversimplify drastically the process he and his team at Glasgow City Council (see page 18), who run the UK's second largest local authority scheme, went through when selecting a new custodian.
Custody is an area where you are going out and buying a product. However, it is a product that is changing and so it is right to review it every three or five years," he says.
The process started when the fund advertised the fact that it was reviewing its arrangements. "Something like 16 organisations said they wanted to receive the request for proposals. We received about a dozen of those back." That was in March this year.
Under the system the scheme operates only half of these would normally be evaluated. "We look at the six cheapest only, except where there are some groups on the margin, say within 15% of the price of the sixth cheapest, then they will be evaluated as well." In fact, there were nine organisations that fell within this price band. "That meant there were three of the original respondents who never got to the races and we did not study their documentation."
So the nine were put through the process. "We had an evaluation team of three and our scoring system for 16 key issues. Each of us separately evaluated every one of the nine submissions against these key issues."Then the team met and tried to agree on a final four organisations. "We all agreed on one organisation - that was the one we happened ultimately to choose - and we all agreed on the Royal Trust Bank as well. There was a little bit of horse trading about the other two, because however structured you are, this is not a precise science." But a list of the four to be investigated in greater detail was arrived at.Each then made a presentation. "At that stage we were pretty impressed with all of them." But it was felt that one candidate was not worth taking any further, as the other groups were considerably cheaper and it was screened out, says Singleton.The remaining three were visited. "After spending a day with each of these, we satisfied ourselves that taking things in the round, they all could give us an excellent level of service." But he concedes there was inevitably a degree of subjectivity. "Some people will like one front-end system better than others."
"At that point we could say to ourselves, we have three organisations here and it does not matter which one we choose, we will be happy with any one of them. So: 'What is the price again?'" As a final check before the decision, all nine submissions were fine-tooth combed again to confirm that the pricing was right against what was quoted and to check particularly for any errors. "So we knew that we had got the price as good as we could. It was then a question of deciding what level of service we would go for and at that stage we could say 'the cheapest person will get it'."
Northern Trust was the chosen custodian for the fund's UK and global assets, in place of Royal Bank of Scotland. Its London-based head of sales and marketing Penelope Biggs says: "We are particularly enthusiastic to be the chosen provider for a fund of the calibre of Strathclyde." The transition of the investments is scheduled for this month.
The area of securities lending, in which the fund has not yet been involved, will be looked at, according to Singleton. "This is on the agenda to be examined once we have the new custodian up and running. We should be able to reduce our costs in a reasonably fixed way."