Irish National Pension Swindled by State Street, Audit Confirms

The Irish national pension fund has been revealed as the latest victim in State Street's transition management overcharging scandal.

(September 27, 2012)- The Irish National Pensions Reserve Fund (NPRF) was overcharged millions of euros after its transition manager claimed to be an agent, but acted as a “riskless principal,” the country’s Comptroller and Auditor General has said.

According to the report, markups of an estimated €2.65 million–5.5 times the contractual fee–were applied to transition fees paid by the pension fund. This amount was reimbursed by State Street.

“In December 2010, the NTMA [National Treasury Management Agency] awarded…one transition contract…to London-based State Street Bank Europe Ltd (SSBE), for the disposal of assets for a management fee based on the value of the assets disposed,” an audit, released Thursday, stated.  “No other compensation, other than certain foreign exchange costs, was to be paid to SSBE.”

After disposing of the assets-valued at €4.7 billion-the bank collected the contracted amount of €698,000. However, “[i]n October 2011, the NTMA became aware through media reports that two senior executives, one based in the United Kingdom and one based in the United States, had departed from the transition team of SSBE,” prompting the NTMA to “[ask] State Street for more information.”

aiCIO was the first news organization to report that Edward Pennings of London and Ross McLellan of Boston had been dismissed from the firm.

The audit report continues: “In response, on 12 October 2011, SSBE wrote to the NTMA explaining that it had reimbursed a UK client following the application of a commission that had not been expressly agreed with the client.”

State Street was then suspended from the NPRF transition management panel-a suspension that remains in place today.

In November 2011, State Street then informed the NTMA that “it had concluded that a commission for which there was no contractual agreement had been applied to the NPRF transactions in transition number 14.” In December, State Street reimbursed the client “€2.65 million which was SSBE’s estimate of the aggregate amount of the mark-ups applied.” (A PricewaterhouseCoopers review would ultimately conclude that the client was in fact overcharged by “€2.61 million…[but] it had been agreed in advance with SSBE that the NPRF would not be required to make any repayment under these circumstances.”)

Agent vs. Principal

A significant aspect of the audit is that State Street, which claimed it would act as an agent with regards to transition 14, admitted in July 2012 that it had in fact acted as a “riskless principal.”

“In its tender submission for transition number 14, SSBE stated that it would act as agent of the NPRF in relation to equity trading,” the audit states. “However, in July 2012, SSBE wrote to the NTMA reporting that, arising from a continued review of transitions undertaken in 2010 and 2011, it had determined that it had acted as a ‘riskless principal’ in connection with the liquidation of certain NPRF shares in transition number 14…and that it had made a profit of around $787,000 on the transactions without taking any risk of loss.”

While State Street would not comment on the issue of agent vs. principal, VP of Public Relations Alicia Curran stated: “This relates to a transition management matter that we self-reported to the FSA in September 2011. In a limited number of instances, we charged commission on transition management mandates that were not consistent with our contractual agreements. As a result of our own internal analysis, we determined that certain employees failed to comply with the high standards of conduct and transparency we expect. Those individual are no longer with the company. We took swift and appropriate disciplinary actions in response to this conduct, and as a result of this we have strengthened our transition management business and enhanced our controls.”


As a result of the overcharging, the NTMA announced it is to take steps to mitigate the risk of a similar occurrence with future transactions. The report said: “The NTMA will seek to improve the visibility of transition agency trades on behalf of the Fund so as to ensure that any attempts at price manipulation would be discovered in the settlement process.”

This would mean that instead of agency trades being settled through a transition manager’s broker account, they would be settled directly with the third party market counterparty. This way the fund’s global custodian could directly match the price of the trade with the market counterparty and this would prevent any improper alteration of trade price data within the transition manager organization.

For larger transactions, and where there is no other way of obtaining trade prices, the NTMA said it would engage the fund’s internal auditor to examine the books of the transition manager, as long as it was cost effective to do so.

The report added: “The NTMA will, where feasible and practical, seek to promote the development of improved market standards and practices within the transition management industry with the objective of improving levels of transparency, third party transaction validation and general oversight.”

With additional reporting by Elizabeth Pfeuti.