Financial Journalist

Financial Times Mandate May 1999
Gerry O’Kane

It may be a new issue for custodians but the pan-European pension resurrects the word most commonly associated with custodial operations: consolidation. The most recent example of the traditional consolidation was the Bank of New York (BONY) deal setting itself to become the world’s largest global custodian with assets of $5900bn after agreeing to buy the custody arm of the Royal Bank of Scotland for more than $816m. The offer follows 35 other acquisitions by BONY over the past three years.

But the new forces of consolidation come from the pensions industry. It is fighting a battle to consolidate its own operations and, should it win, it is likely to create an environment making it even more difficult for smaller national custodians to survive.

The pressures behind this so-called consolidation of pension business are numerous but could end up putting huge sums under custody with global players such as BONY. At the core of the issue are the multinationals. ‘Think about it. It you have large multinationals with subsidiaries across Europe, they are still having to run individual pension funds in each country under each individual investment laws,” explains Mike Gregson, global custody product manager at Bankers Trust. The upshot of having to do this is increased cost. The sums involved are huge and getting bigger all the time.

A survey by consultants William M Mercer gives an indication of what is being discussed. It estimates that the top-35 European pension asset managers control $8200bn, close to the GDP of the US.

While this includes investments made outside Europe and non-multinational groups (including, for example, local authorities), the figure is staggering. According to Mercers, this was in part due to more than two-thirds of pension fund manager mergers last year being cross-border. Naturally, this is much to do with the advent of the euro. But just what size of business movements are custodians looking at, should multinational pension funds gain the right to domicile a pan-European fund in a single jurisdiction?

Ray Martin of Zeneca’s pension fund suggests that administrative fees of between 0.5 and 1 per cent of funds under management in the countries concerned could be saved by multinationals. According to Robert Ellison, a lawyer specialising in pension legislation with Evershed, a UK-based law firm, this figure could be $20bn. But this has not been the only hiccup. The recent resignation of European commissioners has left pension legislation on hold, it being deemed not “current or urgent business”.

Whatever the delays, Mr Ellison believes something will happen to ‘explode” the situation before the end of the year, with favourable implications for both global custodians and multinationals. Benjamin Fraser, head of pension fund sales at State Street, sees the big custodians cashing in too. “The pension schemes will want more than custody. They will also seek accounting services across the jurisdictions, and will need us to understand individual regulations but manage them under one umbrella,” says Mr Fraser Mr Ellison is tipping Ireland as a likely domicile beneficiary. Mr Fraser and Mr Gregson see this change in custodial needs and the way pension funds might be run as strictly benefiting the big players in the custodial market.

There are three reasons why custodians should be rubbing their hands at the prospect of more business. State pensions are gradually being converted into supplementary pension schemes that will fall under the new legislation already proposed at the European Commission. Second, there will be increasing pressure to use private custodial and asset management techniques to boost returns. And third, the advent of the euro is likely to bring a broader international dispersal of funds.

Global Custody Consolidation