Large banks like Citibank, Bank of New York and Northern Trust Co. are winning the business when pension funds change trust or custody providers following ownership changes at the funds' old banks.
Smaller custody banks sometimes don't even make the list of finalists when those funds consider master trust or custodial changes in response to consolidations.
The stakes are large: more than 70 of the nation's 1,000 largest funds - holding $540 billion in pension assets - have been affected by recent bank consolidations or acquisition of divisions.
Several custody searches are still undecided, but the largest custody banks have won a large portion of the business:
One of the biggest custody jobs up for grabs was the $12.2 billion Texas Permanent School Fund, Austin. Fund officials have decided on Citibank; its former custodian, Bank of America, sold its custody operations to Bank of New York. The only other finalists were BONY and Northern Trust, also large custody banks like Citibank.
Another former Bank of America customer, the $2.2 billion Chicago Policemen's Annuity and Benefit Fund, chose Northern Trust as its custodian effective Oct. 1.
Looking for improved services, Times Mirror Corp., New York, decided to find a replacement for Bank of America for its $460 million 401(k) plan just before BofA announced it would be selling its custody operations. Times Mirror chose Northern Trust.
Two corporate pension funds that were BofA customers - the $323 million pension fund of Puget Sound Power & Light Co., Bellevue, Wash., and the $196 million pension fund of Sunkist Growers Inc., Sherman Oaks, Calif. - switched to Bank of New York.
The $75 million pension fund of the American Medical Association, Chicago, also with BofA, switched to Bank of New York's Continental Trust.
Two public fund Bank of America customers, the $3 billion Los Angeles Water & Power Employees' Retirement System and the $280 million San Luis Obispo County (Calif.) Pension Trust, switched to Bank of New York.
Among those still in the midst of searches:
At the $12 billion South Carolina Retirement Systems, Columbia, Bank of New York is expected to replace J.P. Morgan as global custodian.
Officials for the $200 million pension plan at Alaska Airlines Inc., Seattle, haven't decided yet on a BofA replacement, but only Northern Trust and Bank of New York are finalists.
A spokesman for the $680 million Metropolitan Water Reclamation District Retirement Fund, Chicago, another BofA customer, said the vast global networking services that large custody banks offer will be a consideration.
BofA customer Pacific Telesis Group, San Francisco, with a $10.5 billion fund, is expected to hire a big bank when it finishes its search.
Fewer big banks remain
Big banks also benefit when large custody banks combine. Several trust/custody customers of Chase Manhattan Bank, which is merging with Chemical Banking Corp., say they'll stay with the merged entity.
Of course, when two big banks merge, the result is fewer banks to choose from for custody services. At least 47 of the 1,000 largest tax-exempt funds, with more than $466 billion in assets, are affected by Chase and Chemical's planned merger.
Another 27 of the 1,000 largest tax-exempt funds, accounting for $77.4 billion in assets, were affected by the sale of BofA's custody operations.
Pension officers said they see the bank consolidations and preference for large custody banks as inevitable, but some aren't sure what that will mean for them.
"There is a lot of compression in this (bank custody) business," said Carlos Resendez, chief investment officer of the Texas Permanent School Fund. Before deciding on Citibank as its custodian, the Texas fund was talking to J.P. Morgan. But then, he said, J.P. Morgan bowed out of the custody contest shortly before it was revealed that BONY would buy its custody operations.
Only the custody banks with a large volume of custody assets and a commitment to technological advances can survive in a market where fee margins are thin, said Mr. Resendez.
"Personally, I think it (bank consolidation) is inevitable," said Jim Damm, manager of investment accounting for the AMA. Many custody services are now a commodity, and many large banks are low-cost providers, he said.
The consolidations could mean pension funds will see lower trust and custody fees, said Marty Hargrave, manager of financial analysis and investment for Sunkist. But with fewer banks, the direction of fees" also might go the other way. I am not really sure," he said.
The dominant players
The dominant players are four New York banks - Chase, BONY, Citibank and Bankers Trust Co. -plus State Street Bank & Trust Co., Boston; Mellon Trust, Pittsburgh; and Northern Trust, Chicago.
According to data from Pensions & Investments and Money Market Directory, 80 of the nation's 200 largest pension funds -representing $758 billion in defined benefit assets - use at least one of the seven big bank players for master trust services. Some 105 funds, with $1.34 trillion in defined benefit assets, use at least one of the big seven for global custody; 111 of the biggest pension funds, with $1.278 trillion in defined benefit assets, use at least one of the big seven for domestic custody.
All other banks used by the 200 largest pension funds command a much smaller share - 45 clients for master trust, 14 for global custody and 39 for domestic custody.
In the next tier of pension funds - those ranked by assets as Nos. 201-1,000, 359, with $303 billion in assets, reported using at least one of the seven for trust services; 131, comprising $124.3 billion in assets, reported using one of the big seven for global custody; and 260, accounting for $222.3 billion in assets, use one of the big seven for custody.
Again, all other banks used by those 800 pension funds had a much smaller market share. The most glaring difference - only 16 pension funds use any other bank for global custody.
(Figures for Chase and Chemical banks were combined. Not all tax-exempt funds reported trust or custody services.)
Still place for smaller banks?
Despite the increasing dominance of the big seven, some pension funds will continue to want services from smaller trust and custody banks, said Cheryl Derezinski, first vice president and group head for master trust and custody at Comerica Bank, Detroit. Comerica, as of June 30, 1994, reported $791 million in total global custody assets for tax exempt clients.
She said some pension funds of all sizes want "personalized" trust or custody services from smaller banks. Smaller banks can be quicker and more nimble and can meld lending, treasury management, private banking and other services through strategic alliances with clients, Ms. Derezinski said.
However, some pension consultants said global custody increasingly will be a stumbling block for many smaller banks; they noted as pension funds continue to shift their assets to international investments, they need more global custody services.