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Special Report

Impact investing


Trustees raise the pensions bar

The high profile afforded pension fund issues in the UK media has added to the regulatory pressures already on trustees to improve corporate governance and to address their significant liabilities. In turn, this has led to a highly competitive securities services market in which custody mandates are sent out to RFP on a much more regular basis than in the past.

Pat Sharman, head of relationship management, pensions at HSBC Securities Services, says in the past, custody was seen as an administrative function that did not add much to value but this has changed over the past few years.

"Because the pensions business is much more demanding and in the public eye, trustees have become more cautious and are using investment consultants," she says.

"These advisers are recommending to trustees that they review their arrangements on a more regular basis. The result is that trustees are pushing up the quality of services because the market has become more competitive."

A number of mandates have already come up for review in the past year. The two main UK coal industry pension schemes - the £8bn (€11.7bn) British Coal Staff Superannuation Scheme and the £10.5bn Mineworkers Pension Scheme were both retained by JP Morgan Worldwide Securities Services in August.

The British Coal Staff Superannuation Scheme provides pensions to 67,000 former managerial and clerical staff of British Coal, while the Mineworkers fund serves 290,000 former industrial employees.

In July, ABN Amro Mellon Global Securities Services won a mandate to provide custody, investment accounting and performance measurement for the £1bn North Yorkshire Pension Fund. The fund used consultants Thomas Murray to conduct a formal review to ensure it would continue to adhere to best market practice for custody.

Neil Sellstrom, principal accountant at North Yorkshire County Council, said ABN Amro Mellon's accounting and performance reporting suite were a major factor in the decision.

"The UK market has seen a lot of requests for proposal in the past year, particularly as pension funds have had to get much more commercially minded in order to find a way out of the deficit environment they are in," says Nigel Taylorson, head of relationship management, UK and Ireland at ABN Amro Mellon. "They are looking for efficiencies and are much more cost conscious."

This drive for efficiency is driving some consolidation, says Taylorson. For example, the bank picked up all of the Derbyshire local council business last year. Previously, the fund was using three separate providers.

Along with these wins, ABN Amro Mellon also picked up the £17bn Railways Pension Trustee Company contract and took over as sole custodian for the £3.2bn Merchant Navy Officers Pension Fund. Following a scheme restructure, it was also appointed to provide custody services to the £600m City of Westminster Pension Fund.

Malcolm Pobjoy, head of UK sales, institutional investors at BNP Paribas Securities Services has also seen an increase in RFP activity during the past year. "Public sector pension funds are being driven by price and services. RFPs for public sector funds are much more sophisticated in their reporting requirements than they were four years ago. And there is still a big focus on price."

One of the hottest topics for UK pension funds is liability driven investment, says ABN Amro Mellon's Taylorson. "This is leading to significant investment in derivatives, futures and alternative asset classes as funds seek to match the term of their assets with their liabilities."

This in turn requires a higher level of investment by securities services providers in order to build the capability for valuing these instruments and accounting for them appropriately, he says.

Pobjoy agrees that the private sector is moving more towards liability driven investments. As a result, they need to know whether they have the infrastructure to support their fund managers in administering alternative investments and provide the reporting required that will enable trustees to understand these more sophisticated investment strategies.

HSBC's Sharman says clients that are moving towards more diversified instruments need to manage the risks associated with those while also ensuring they are maximising the returns.

"The diversity of investments means that record keeping has become more complex," she says. "Pension funds increasingly want custodians to be master record keepers of all instruments, even if they are not under custody, such as synthetics. They also want independent reconciliation and pricing of these instruments."

This is challenging, says Sharman, as instruments become more diverse and pension schemes look for greater returns. "Corporate pension funds are putting pressure on their trustees to provide updated information, usually online, so they can determine where the fund is at any point in time. This is a big challenge for custodians and will continue to be for the foreseeable future."

Some products, such as securities lending, are also growing in popularity, she says. "Stock lending has been around for a long time, but trustees are now more open to this. They are also becoming interested in using cash management products. The days of leaving cash with the custodian and not worrying about it are no more. There is big pressure to use idle cash in liquidity funds or money market instruments," says Sharman.

Corporate pension funds are interested in creative platforms for defined contribution schemes that will keep their employees happy and negate the stories about the closure of defined benefit schemes, says Pobjoy.

"Corporate pension funds are trying to turn the closure of DB schemes into a good story for employees by stressing the greater level of self-control and opportunities that are apparent in defined contribution schemes (DC)," he says.

The providers of administration services for DB schemes might not have the technology or sophistication to service these more flexible DC schemes, says Pobjoy of Paribas. Administrators of DC schemes need to provide each participant with access to a range of funds so they can manage their own unit allocation and investment strategies.

"The real value of DC schemes is that they have got people interested in pensions. With DB schemes the value of the pension on the day you retired was important. With DC, people are looking for online access so they can switch funds during the contribution term. That is creating new opportunities for us as the DC models require a different skill set which not all the traditional DB administrators possess."

Quality of service is a recurring theme when talking to UK custodians. BNP's Pobjoy says the bank has focused on a client segment that wants a flexible servicing model.

"These clients are fed up with the factory approach to servicing. They are looking for better quality services at a particular price point. I would say about 80% of the evaluation process is driven through professional consultants and they are very good at keeping expectations realistic. But consultants are also good at driving hard bargains with custodians, so it is a very price sensitive and competitive market to be in."

Sharman would agree with this assessment. She says relationship management is becoming a key factor in UK custody. "Every custodian can settle a trade, pay dividends and manage corporate actions. And we can all do fund accounting. But relationship management is absolutely key and is where you can make a difference. We work with clients to provide tailored and personal services that suit individual clients, rather than providing a standard product."



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