CIO Profile: Should Pensions Merge Custodial Searches?

Glenn Cossey, investment manager for the Norfolk Pension Fund, tells aiCIO that there is strength in numbers.

(June 18, 2013) – There are 99 local authority pension funds in the UK and Glenn Cossey wants to speak to all of them. Collectively they manage well in excess of £150 billion, yet reports last month suggest they are paying over the odds for the same services used by corporate pensions.

However, this could all be about to change as a national framework put in place by a group of these funds could end this imbalance.

This week, the £2.5 billion Norfolk county council pension, along with several neighbouring funds, is launching a way for peers to appoint a custodian more quickly and cheaply than ever before.

“Custodians will sit on a bench of providers,” says Cossey, “and all funds that are part of the Local Government Pension Schemes (LGPS) will be able to run mini competitions to decide on which is best suited to their needs.”

Instead of pension funds having to trudge through the long-winded tendering process, the founder members of the collective behind the framework will have done the hard graft of attracting custodians, carrying out due diligence, and agreeing basic terms for them.

It will cost pension funds that use the service a fraction of what they usually pay when appointing a service provider–and the timeframe is quicker too.

“We have to renew these contracts every four years,” says Cossey, citing the procurement regulations for public pensions in the UK, “and we know the process can take up to six months. It can also cost up to £50,000 in time spent by staff on the project.

“The benefit of this framework is that it reduces costs. If you want to join, there is a small fee–we’ve not decided how much yet, but it will be around £2,000-£3,000 for non-founder members–and the process should take no longer than four-to-six weeks. The founder members who set up the framework have done all the due diligence, and gone over the legal terms and conditions; the other pension funds just have to choose which provider is right for them.”

Cossey and his peers at the other funds are becoming old hands at this type of arrangement. Over the last two years they have set up similar frameworks for LGPS members to access actuarial advisors to value liabilities, and investment consultants to advise on asset allocation and manager selection.

“We were the first to do this on a national level,” he says. “In the south-west of England, Devon, Cornwall, and Avon constructed something similar, but on a geographical basis. Croydon set up an actuarial framework, but only using one supplier.

“We looked at the practicalities of the LGPS with its 99 funds and all the cross-over in suppliers-it just made sense.”

Around Easter time, custodians were invited to attend an open day to find out more about the framework. The founder members are now busy inviting custodians that are interested in accessing the (potential) £150 billion pot to tender this week. By mid-August they should know who is game and be ready to open for business in September.

“It’s really just developing the procurement processes we have on a local government level,” says Cossey. “There is collaboration in other departments, so why not pensions?”

Does this stretch to a framework for investments? Some local authorities think it does, but Cossey is not so sure.

“A lot of funds are talking about it, but we think this framework is best suited to support services. In this sector, there are a limited number of suppliers who provide a similar service. Investment is different–there are numerous asset classes and strategies, each using a different benchmark with a different aim as each pension fund is after something different.”

But Cossey is not closing the door completely.

“Passive investment is possible, using this framework. Buying funds off the shelf that track indexes and are pretty much commoditised could work,” he says, but there are no plans in Norfolk to start one up, at least for the moment.

“Our trustees have been very supportive,” says Cossey. “They appreciate that sharing our experience and knowledge–along with the cost–is best practice. We have also worked in a system of rebates which are redistributed to the members using the framework from the providers.

“We also get non-monetary benefits from the suppliers on the framework, such as training sessions for investment staff and trustees.”

What’s not to like?

“Some people were sceptical,” says Cossey, “but about half a dozen came on board for the actuarial framework in the autumn and we have others joining the investment consulting one. We want to get the Pensions Regulator on board and we have been talking to various governmental departments that are responsible for local government, as we think the approach makes sense.”

To find out more about the framework, click here 

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