Some American multinational pension executives are considering risking the ire of foreign money managers and others by separating custody and money management for their foreign subsidiary pension plans.
Among them are Digital Equipment Corp. U.K., Reading, England, which is searching for a custodian for its $390 million pension plan, and W.R. Grace & Co., Boca Raton, Fla., where pension officials are thinking about separate custody for one or more of its foreign subsidiaries. E.I du Pont de Nemours & Co., Wilmington, Del., also is rumored to be considering it.
In the United States, custody and money management are almost always separate. U.S. pension officers believe the separation provides a cross-check on the reconciliation of assets and the legal protection of custody by a third party.
But in Europe and most of the rest of the world - except for Canada - custody is typically divided among the fund's money managers. These managers provide their own custody and report on themselves, and they typically prefer it that way.
Now, however, the issue of separating investment management and custody has risen to a "fever pitch," said Stan Meader, a vice president with Mellon Trust, Pittsburgh. The Barings PLC bankruptcy and the Robert Maxwell pension affair accelerated the interest.
Officials at Bank of New York; State Street Bank and Trust Co., Boston; and Northern Trust Co., Chicago, also report rising interest in separating custody and management - as well as some consolidated reporting.
Some U.S. multinationals already separate the two, including Halliburton Co., Dallas; TRW Investment Management, Cleveland; and General Motors Corp., New York. But most still use bundled custody and asset management for their foreign subsidiary pension plans, a situation they wouldn't tolerate for U.S. plans, Mr. Meader said.
One reason some are considering the separation: it would make it easier for the U.S.-based pension executives to supervise the overseas plans. Following the Maxwell and Barings cases, the wonder whether they have proper oversight and legal separation of their assets from managers.
"I think - just on a human nature basis - when you see things like that happen, you say, 'I would like to take a closer look at what is happening.' We felt that way after the Maxwell situation, clearly, and that was one of the primary reasons we went to a custodian," said Robert A. Hamje, president of TRW Investment Management. TRW uses Mellon Trust for its U.K. subsidiary pension plan, which has about $170 million in assets.
Halliburton a pioneer
A pioneer in separating custody from money management for U.K.-based subsidiaries is Halliburton. Nathaniel H. Duffield, director-trust investments, remembers the reluctance among subsidiary pension plan trustees until the Maxwell affair hit.
Mr. Duffield said it is "impossible" to separate U.K. subsidiaries' custody and asset management without the support of company headquarter's management. At the mere suggestion of separation, some foreign money managers complain it will cause them "trauma," said Mr. Duffield.
"The Maxwell affair and the Baring thing have only served to solidify opinion. I mean no one questions independent custody over there anymore for us," said Mr. Duffield. Halliburton's U.K. pension funds have about $300 million in assets.
State Street Bank is master trustee and custodian worldwide for Halliburton. The consolidated reports State Street has put together for Halliburton use extensive graphics, permitting Halliburton's management to get a quick overall picture of plan assets.
"People who had Baring as asset managers as well as custodian had their assets frozen for a considerable period of time, and it could have turned out a lot worse than it did," said Mr. Duffield.
But TRW and Halliburton are in a minority. One pension officer estimated nine of 10 pension funds belonging to Interforum, a discussion group for about 40 large multinational corporations, still have overseas pension plans that are bundled.
Because the pension plans are paying the bills for money management, some people assume pension officers can simply issue an edict and the desired separation will come about.
But it's not that easy. They have both the foreign money managers and the trustees of the foreign pension funds to convince, and many U.S. pension executives see that as a daunting task. Plus, they need the support of headquarters management.
Mr. Duffield said he had to sell separation to the trustees of seven subsidiary plans, some with six trustees each to convince. He recalled these trustees at first told him he would only "stir things up" and they didn't appreciate his "meddling" with their fiduciary duty.
Pension funds vulnerable
Still, bundling leaves a pension fund vulnerable to many problems.
For example, pension officers might not immediately know what their exposure is to a particular market or security because they can't get the information quickly. A multinational could have a dozen or more foreign subsidiary pension plans, each with several money managers reporting individually on accounting, performance measurement and securities lending information.
Also, different methodologies are used in reporting performance measurement: while a multinational corporation is getting time-weighted investment returns from its U.S. custodian, it might be getting dollar-weighted returns from foreign money managers.
With the difficulty of tabulating custody numbers from a multitude of custodians, the U.S. pension officer may be slow to discover whether plan funding levels are adequate, or whether all FASB 87 requirements have been met in a timely fashion.
Another concern is that a multinational pension officer can devise a global investment strategy, but often doesn't know whether it is implemented accurately and is performing as well as it should.
Another difference is that in the United States, pension officers are typically well-trained in finance and can quickly spot potential difficulties. But administrators of foreign subsidiary pension plans typically come from the human resources department and are less likely to recognize problems.
Overseas money managers also bundle securities lending and custody charges with their money management fee. The result, said Mr. Meader, is the pension officer doesn't know whether the fees are competitive.
Resistance to change is strong
Yet, resistance to separating custody from money management is strong.
At first, Mr. Duffield said he had a difficult time convincing trustees of Halliburton's seven subsidiary plans that he was trying to help them perform their fiduciary duty. Now, he said, they like the separate custody.
TRW's Mr. Hamje very much likes his consolidated master trust setup for his company's U.S. and U.K. pension plans. He said he gets immediate information on TRW's U.K. subsidiary online from Mellon computers.
Unlike most U.S. multinationals, the $50 billion General Motors pension funds have long pursued master custodian relationships for foreign subsidiary pension plans. The $3 billion pension fund of General Motors of Canada Ltd., Oshawa, Ontario, established a master trust relationship in Canada in the mid-1980s. Its master custodian is Royal Trust Corp. of Canada, Ontario. GM's Vauxhaull Motors Ltd., Luten, England, pension plan, with about $795 million in assets, has Chase Manhattan Bank Global Securities Services, New York, as its master custodian.
The advantages of consolidated custody are prompting officials at W.R. Grace to consider it. "It is one of the things that we are looking at in a general way," said Daniel M. Murtaugh, director of pension financial administration for the $790 million U.S. pension plan. W.R. Grace has four major foreign subsidiaries with a total of about $280 million in assets.
Still, the majority view may still be represented by such pension officers as Charles A. Service, corporate director for capital management and trust investments at the $3.4 billion Unisys Corp. pension plan. Mr. Service said setting up a worldwide master custodial relationship is "not high on my priority list" for now. Unisys has 14 funded defined benefit plans outside the United States with $700 million in assets.
Although he said there are definite advantages, "I am not single-handedly going to change systems which have been ingrained in cultures through decades."