Pat Sharman believes traditional custodians are not serving UK pension funds well and argues it could be time to shift towards the Dutch approach.
On 9 August 2012 Charlotte Dujardin, the young British dressage rider, buoyed by success of the team gold days earlier, rode her Dutch horse Valegro to victory and the individual Gold Medal at the London Olympics with a score of 90.089%.
This Anglo-Dutch partnership has been recognised as one of the greatest of all times, remaining unbeaten together since 2012. Since well before the Glorious Revolution of 1688, where the English Mary Stuart and the Dutch William of Orange ascended the British throne, the history of both the UK and the Netherlands has run side-by-side, often competing, sometimes collaborating but always learning from each other.
When it comes to pensions we often see comparison drawn between the regimes of the two countries. However, in order to benefit from each other we have to first understand the fundamental differences between the two countries.
In the Netherlands, the systemic importance of pension funds and their "bank managers" for the economy is not lost on the public or the regulator. With a wage replacement rate of 92% this is hardly surprising. It will come as no shock then that, despite the relative size of the pensions industry in the Netherlands, the defined benefit (DB) market in the UK is clearly underdeveloped in comparison.
Regulatory-led consolidation of Dutch schemes in the wake of the 2008 financial crisis has resulted in schemes merging together to achieve greater efficiencies. Scheme governance has been increasingly professionalised in order to maintain the long-term sustainability of these open DB schemes. Importance is given to a delicate governance balancing act where trustee boards must have sufficient information to have ‘countervailing power'.
In contrast, outside of the move towards pooling in the LGPS, we are not yet seeing an equivalent shift in the UK. This leaves a significant proportion of UK DB schemes in the ‘small to medium' category, where services levels by providers can vary dramatically yet funds don't know they can expect better. In the Netherlands this is increasingly not the case and I believe pension funds here should look at whether they really get the level of service they need.
To give one example - the provision of custody and associated services in the UK can be radically different to that of our Dutch neighbours. Leading providers of custody services here tend to be big universal banks, whose focus is on a global business across their diverse business structure. These banks need to grow in sectors that buy globally across all business streams. UK pension funds, aside from the very largest, don't tend to fit this profile. What then does this mean for these funds?
- Pension funds are not the key client group for these banks;
- Innovation is not focused on tools for pension funds;
- Client service is not centred on specialist knowledge of pension funds.
In a developed pensions market such as the Netherlands, with complex reporting to the regulator for pension funds, custodians have had to become specialists. We've seen a move by some local players to make pension funds a priority, putting innovation and specialist understanding of funds and their challenges at the heart of their business. Simple provision of securities services has developed and broadened to respond to the increasing complexities of pension fund governance. I believe UK funds should expect the same from their providers here.
So in the UK, like we see across the North Sea, I would say we should ensure that pension funds know to expect more of their custodians, not just as ‘bank managers' or market facilitators, but also as repositories of data and knowledge that should be shared in order to maximise opportunities for improved outcomes.
Much like Dujardin and Valegro building up to 2012, my hope is that by learning from Anglo-Dutch partnership we can help UK pension funds their gold medal.
Pat Sharman is UK managing director at KAS Bank
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