Swiss global custodians serving their local market are prepping themselves for potentially lucrative business as state sector pension arrangements join the funding camp.

National telecoms group Swisscom and SwissRail have decided to go the outsourcing route and are looking at global custody issues (see page 42).

The eyes of local custodian banks, which include a number of strong players, must have widened initially at the size of the new prospects. The presumption is that it will stay with the domestic providers, which besides the two huge banking groups Credit Suisse and UBS, include Julius Baer, Pictet, Lombard Odier and a number of the cantonal banks, notably Zuricher Kantonal.

Some outsiders may also be showing interest, including Citibank or State Street, the non-locals that have made most inroads so far.

Up to now, the locals have kept a firm but not exclusive grip on the very substantial domestic pensions market. Says Stefan Staub, head of global custody at one major player, Credit Suisse Asset Management, In Switz-erland, we have some Sfr400bn ($300bn) in pensions assets, which makes our market an attractive one for both Swiss and external players."

The ground rules for the second pillar pension scheme, introduced on a mandatory basis in 1985, did not set down any custody requirement. Staub believes the current regime predisposes funds towards using a custodian. "Swiss funds are subject to a series of investment limitations. So they obviously need a custodian to make sure these limits are monitored." But it was not until the early 1990s that pensions funds started to take global custody seriously, he adds. "It was only around that time that we established our operations for pensions funds."

At private bank Pictet in Geneva, Gilles Paupe, who looks after the domestic global custody institutional market, reckons the greater complexity of investment requirements and need for risk control gave a real impetus to the use of independent custodians: "It really made sense to have a custodian to avoid nasty surprises." He says that Pictet won its first Swiss pension fund custody mandate around 1985, but the big upsurge in interest was five years later. Paupe says: "In the last two years, even medium-sized funds with perhaps just Sfr80m-plus to invest, have been looking at custody services."

But where a pension fund outsources to just one manager, he agrees that there is not that much need to appoint a global custodian, with the caveat: "Certainly not all investment managers are equally good on the custody side." And the need for a custodian increases exponentially with the number of managers used.

Another custodian active in the Swiss market is Citibank, which has its own distinctive approach. It claims to have made greater inroads on the domestic custody front than any other non-Swiss bank. "It has been our international capabilities that have attracted new customers to us," says Dietmar Roessler, sales manager for Switzerland and Germany. "Swiss investors' asset allocation is changing dramatically. Foreign equities can now be up to 20% of portfolios in the top-tier pension funds, where some years ago it was below 10%," he adds. "The euro will in-crease this tendency to invest cross-border. It will also increase the sophistication of services they require," says Roessler.

Swiss pension funds, compared with other institutional investors such as in-surance companies, have limited op-erational capabilities. This means that they usually just need a single custody provider, unless they are extremely big. On the other hand, their requirements are not as complex as those of the insurance world with international branches and operations, he says. "The classic global custody requirement for a fund is 'a single-window' concept for settlement, to-geth-er with a range of value-added services."

What makes the Swiss market different from others is the range of add-on services, which are key from the custodians' perspective. "We never saw the market as being just plain vanilla custody," says Staub. "In fact, it is only with these extra added services that you can survive." Credit Suisse's target is funds with Sfr50m-plus in assets. "These funds are looking for more efficient solutions for their administration work, such as reporting, controlling, risk assessment and accounting."

Since funds are monitored by specialist auditors, fund accountancy services are among those expected of custodians. "We offer this accounting function to provide clients with the revenue and balance sheet accounts required under the law," Staub adds, pointing out that global custodians will have much of the information needed as a matter of course. "We can also build in the derivatives reporting and lending for off-balance-sheet reporting."

At Pictet fund accounting is high on the list of services provided. Paupe says it makes sense if the funds let custodians handle this for them, since all trades are processed automatically through the interface we provide." Pictet has an accounting firm subsidiary with an electronic link to the bank for fund data. Another service that neatly dovetails into this , he considers, is the tax reclamation work relating to double taxation treaties between the domicile of the client and the country of investment.

"We have been providing proxy voting services to enable clients to exercise voting rights," he says, adding that though this had been available for 10 years or so, there had not been much interest in it. Attitudes may be changing with the growth in awareness of the importance of corporate governance issues.

Funds' need to maximise the information about their portfolios has led to custodians developing sophisticated analytical systems, provided through on-line links, enabling them to monitor their portfolios at their discretion. Staub claims: "We reckon we are state of the art in providing performance data and analysis, as well as risk assessment and stress testing." Citibank has tied up with Frank Russell for performance reporting and analytic services.

Securities lending has been part of the Swiss marketplace for the past decade. "But it's only in the last few years that there has been real interest in the area by clients," says Paupe, who attributes the slow take-up to the traditional caution of pension funds. In fact, lending has become so standard that now even high-net-worth individual investors are offering their portfolios. However, with the Swiss stock market very efficient and highly liquid, even custodians admit the returns are not that exciting. The main rewards, as elsewhere, come from lending international stocks. Citibank sees a distinct trend from principal to agent lending. "There is strong interest in this approach, as agent lending with its increased transparency and lower capital requirements can significantly increase lending revenues," says Roessler.

Consultants are becoming more active in custodian selection and getting a grip on the business. Even a universal bank like Credit Suisse calculates that half the requests for custody proposals it receives come through consultants, while Pictet puts the figure nearer 60%. Staub sees advisers' role as being extremely useful in providing funds with objective advice and consulting.

CSAM reckons that it has built up its business to be number one in the market in terms of customers and asset volumes, while Pictet points to its prime position in terms of customer service and satisfaction, borne out by surveys. Citibank thinks that as funds spread their wings into more overseas investments, there will be a natural gravitation to it as the global custodian. "We are seeing a significant in-flow in new business." But its competitors will not allow it to hold any such advantage for long."