The role of custodians is advancing beyond traditional functions of safeguarding assets and settling trades, to the full administration of pension fund investments.
Charl Bruyns, Head of Investor Services South Africa for Standard Bank says demand for independent reporting and lower cost is fuelling this change and more consolidation in the industry can be expected over the next five years.
Banks that have the scale and market penetration will help bring costs down by using tailored technology solutions to integrate functions that would normally have been outsourced to different parties.
"It is important to take costs out of the value chain. The cost of service has come down and in the next five years we will see more consolidation from providers," says Mr Bruyns. A custodian is a financial institution that holds customers' securities for safekeeping to minimise the risk of their theft or loss.
A custodian is independent to the pension fund's investment management process and can integrate custody and accounting platforms seamlessly as all the trade data related to a fund resides in the custody system.
"There is a level of comfort in getting the right view and knowing you are compliant. A bank like Standard Bank has ability to give an independent view with a great deal of integrity and is therefore well positioned to provide investment administration to pension funds," says Mr Bruyns. Standard Bank has the largest market share of the South African custody market, which is valued at approximately R11 trillion, making it the largest custodian on the African continent. In June, Standard Bank Group was awarded "Custodian of the Year" for the sixth consecutive year at the annual Imbasa Yegolide Awards presented by Batseta, the Council of Retirement Funds for South Africa.
Pension funds have various segregated investment mandates across the asset management industry, making it difficult for a pension fund to get a consistent consolidated view of assets.
SA asset managers and life companies are moving towards outsourcing additional functions by outsourcing them to specialists. "By reducing the layers in the administration process, it allows for a decrease in the number of parties involved in the management of the funds," says Mr Bruyns.
Asset safety is a major priority for a pension fund's board of trustees, which is another reason the shift towards providers with a full suite of service offerings is taking place.
"It's the right shift as it's all about safety. The custodian protects you when the asset manager trades. Asset safety is the number one priority," says Mr Bruyns.
The local trend to focus on the accountability of trustees is also raising the demand for more independence and transparency. "Being able to adequately monitor investments is important and we are already seeing this consolidation taking place globally, where administrators are collapsing into the banks, which then become the record keeper and ensure compliance functions are met," says Mr Bruyns. Similar moves will take place across Africa as the markets expand and the need for improved administration increases.
The vast array of transactions being done through a master custodian arrangement also provides an opportunity for consolidation of the pricing within this value chain. "We are able to provide a complete solution that simplifies the model and brings the cost of delivery down. We are investing in technology to be able to provide information to the fund manager and pension fund investment committee's online. They can go to the front end to get investment positions, compliance and performance reports immediately. It is a massive value-add to have that access," says Mr Bruyns.
Advanced technology solutions like these will enable funds to keep up with the increasing complexity of investments. Having consistent information across all portfolios in line with ever-changing accounting standards ultimately provides major economies of scale. It saves time and money and ultimately enables trustees to focus on what they need to do.
Mr Bruyns says independent reporting and administration will become part of the established operating model for retirement funds in Africa, much like it has in Europe and the US.
"Standard Bank now has coverage in 109 markets where pension fund clients can invest while being serviced from Johannesburg. The business is supported by an integrated technology platform that includes a dual site processing model, which results in the highest levels of risk mitigation.
As a leading African financial institution, we believe we are well positioned to assist pension funds in improving their levels of compliance and efficiency and partnering with them on this journey," says Mr Bruyns.
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