Pension funds seem to be increasingly attracted to consolidating their security services with a sole custodian.
In 1999, major global custody mandates were awarded and the trend has continued throughout the first few months of this year. When selecting custodians, pension fund sponsors apply different criteria, often following consultant’s advice. But the need for a better and quicker information delivery seems to be a crucial one. Last March, US-based multinational Minnesota Mining and Manufacturing 3M appointed ABN Amro Mellon to provide master trust and global security services to the group’s $1.5bn (E1.6bn) defined benefit in 15 countries outside the US. This beat State Street, Chase and Northern Trust who also competed for the mandate. The main reason behind the agreement was the banks’s ability to provide the company’s home office with online, timely access to information on its worldwide pension plan assets. Apart from this reporting service, ABN Amro Mellon will also offer 3M consolidated accounting, performance measurement and analitycs, and other global custody services.
Technical skills and client service were also behind the decision from Italy-based Cariplo to award Chase Manhattan with a $3.8bn global custody mandate – one of the most significant wins during last year – to provide consolidated accounting and reporting services. Indeed, custodians are working hard on developing products such as internet and e-commerce services as more pensions funds are finding it increasingly difficult to deal with all the changes that globalisation has brought to administration and settlement issues.
In the UK, all the major pension funds are facing these problems and have found, in global custodian, the best way to handle the new situation. The London Pension Fund Authority (LPFA) awarded Chase Global with a £2.4bn (E3.9bn) global custody mandate, now extended to £3bn. “The actual mandate was awarded in 1995 and was reviewed last year. Before signing the first contract, we explored the services offered by other custodians and we thought then that Chase was the best option for the pension fund,” says Amanda Walker, head of finance and investment at LPFA. “One of the reasons why we renewed the agreement with Chase was that we wanted to bridge the year 2000, because what might happen was unpredictable ,” she says. “And also we wanted to take into account everything to do with the euro-transition, and we thought that we should continue working with the same custodian.”
Custodians have to convince pension funds of their commitment to remain as the main player in this consolidating industry. This was the criteria applied for the £1.1bn Leicestershire County Council pension fund when selecting Bank of New York as its global custodian, later last year, substituting the fund’s former custodian, Royal Bank of Scotland.
Sometimes, costs are the major reason behind custody mandates awards. In February last year, Scottish Power’s pension scheme, with assets of £1.8bn, appointed State Street as sole provider of its custody and accounting business, replacing the previous interim custodian Chase. Stuart Frame, pensions development officer at the UK energy group, says: “There really was nothing to choose between the core custody services of State Street and Chase. At the end the trustees chose the former for purely cost and value added reasons.”
The £700m Royal County of Berkshire (RCB) pension fund also decided to appoint a new custodian – Midland Securities Services – replacing Lloyds due to a ‘dilution’ of its services since the integration of NatWest into its custody business. Jack Johnson, fund manager at RCB then said: “We were not unhappy with the Lloyds service per se, but the custody stability had altered slightly and we decided to go to tender.”
Other UK-based pension funds like Norfolk County Council, Schulmberg, Molins and United Biscuits chose Northern Trust as their custodian, awarding the US bank with £1.25bn, £329m, £350m and £90 mandates respectively. In all cases, the decision was based on the firm’s expertise in accounting and internet reporting, as well as on its track record in providing security services for local authority schemes.
What is clear when looking these custody mandate wins is that US groups are dominating a large portion of the new custody business, gaining more opportunities within the European pension fund industry.

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