The growth of separate custody banks used by UK pension funds has grown strongly over the past four years and is now the predominant means of providing these services, according to the latest research by Greenwich Associates, among 389 UK funds with total assets of £451bn (Ecu631bn).

Just under half of funds (48%) now use a separate entity, up from 33% in 1994, while 28% of funds use their investment managers only and just 20% do their custody internally.

Not surprising is that three quarters of funds with five or more managers use separate custodian banks, making them their heaviest users, while two thirds of funds with assets of over £1bn take the same route. Local authority funds are now well established users of separate custodians, with around half of funds using them, compared to a third four years ago.

To confirm the trend, the study finds that the proportion of hirings of separate custodian banks has risen steadily with 21% of funds hiring these in 1997/98, up from 15% in 1996. Local authorities have come to the fore - around 30% of these funds have hired them in the past two years.

While 10% of funds intend to hire a separate custodian, a similar proportion expect to terminate their current relationship. The survey gives some insight into the 'new demand' , as it reckons that 5% of all funds who do not currently have a custodian ( these have assets of £5.8bn) expect to take one on this year, while 10% of funds with a separate custodian expect to switch their supplier - their assets total some £36bn. This would put the total coming into the market for separate custodianship at around £42bn.

Of the 187 funds using custodians for additional services, around half avail of the management of excess cash and forex services, but less than 10% use securities lending services. Just over 10%, use custodians for performance measurement, Greenwich finds.

Funds with a separate custodian just use one bank predominantly (805), though 16% use two and just 4% use three or more. About a quarter of local authority funds use two.

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