SACRAMENTO, Calif. - The $100 billion California Public Employees' Retirement System has cut a deal with State Street Bank & Trust Co. that will reduce its projected master custody costs by 40% over the next three years.
The new negotiated fee schedule means the fund's master custody costs will not grow as much with fund growth as they would have under the previous fee schedule.
The new lower fee negotiated by State Street Bank, the fund's existing custodian, may have dashed hopes by other banks for a general increase in custody fees.
The nation's largest defined benefit plan also granted at least a temporary reprieve to four real estate managers identified for termination by a staff and consultant report.
And, in an unusual move, trustees of the $100 billion fund turned over authority for hiring and firing real estate managers to their new senior real estate officer, David Gilbert.
In the custody deal, CalPERS' investment committee approved a contract for existing custodian State Street Bank & Trust Co., Boston, that saves an estimated $10.4 million over the three-year life of the contract. To get the deal, trustees waived the traditional bidding process.
As approved, fees would be $13.275 million over the next three years, vs. $23.642 million CalPERS officials estimated under the old three-year contract with the bank.
In addition, a more modest $7,000-per-portfolio fee for new portfolios established as of March 1, 1995, would replace the current charge of one basis point.
The new contract, estimated at less than one-half a basis point, appears to be extremely cheap. "There is no question that this is a great deal for CalPERS. I don't see anyone else willing to drive down to that level," said Bill Imhof, a director with the Alliance for Fiduciary Consultants, Parsippany, N.J., a financial services consultant.
The deal suggests CalPERS is State Street Bank's flagship account, and the bank wanted "to hang onto it," said Mr. Imhof.
"The fees in this whole (trust and custody) business have gotten almost suicidal."
He said it's possible other pension funds are going to come to their custodians seeking the same kind of inexpensive pricing.
Fee "very specific" to CalPERS
The low CalPERS fee was "very specific" to CalPERS, said James J. Darr, executive vice president and director of U.S. financial asset services at State Street Bank. He said CalPERS, at $100 billion, has only a few peers.
In deciding on what fees to offer, State Street Bank took into consideration that it lends securities and manages assets for CalPERS, said Mr. Darr. (At the same board meeting where the custody contract was approved, the bank was chosen as a new currency overlay manager for the fund.)
Another consideration, said Mr. Darr, was that CalPERS is innovative and State Street Bank can get ideas and develop products to market elsewhere.
The new contract is a "profitable relationship for State Street. This isn't something where we are giving away the store," said a spokesman for the bank.
In the past, analysts following State Street Bank's stock worried about its low custody fees. They noted the bank is more dependent on custody fees for revenue than are most banks. But the bank spokesman said analysts are "happy" with State Street Bank.
By winning the new contract, State Street has locked out other custodians from competing for the job. It also has locked up California's two biggest pension funds, as it also is custodian for the $60 billion California State Teachers' Retirement System.
Couldn't get a better deal
Even though competitive bidding is a normal part of the fund's contracting process, CalPERS' staff believes it couldn't get a better deal. California state contracting guidelines would have required the bidding until Proposition 162 passed in 1992 and gave California's state and county public pension funds more autonomy from government bodies.
"Due to the extensive negotiations with the contractor that have resulted in major fee reductions and additional services, staff believes no significant additional economic or business benefit will result from engaging in a competitive bidding process in this situation," Robert Aguallo, assistant executive officer of investment operations, said in a report.
"We did obtain market prices. We did some checking on bids that other financial institutions received. We also checked with our consultant, Wilshire (Associates). We believe (State Street Bank's fees) are competitive," Mr. Aguallo said in the report.
A change in custodianship would have meant CalPERS changed its custodian for the third time in nine years, said Mr. Aguallo. Such a change could be "very costly and disruptive" to the retirement system, he said.
CalPERS officials estimate the fund will save $2.4 million the first year of the new contract, $3.4 million the second year and $4.6 million the third year.
In real estate, the board granted one-year contract extensions to 10 real estate managers.
Four of those had been put on a termination list by the pension fund's staff and real estate consultant PCA/E&Y Kenneth Leventhal Real Estate Group, Los Angeles. They are: Equitable Real Estate Investment Management, Atlanta; LaSalle Advisors Ltd., Chicago, (for the old LaSalle Advisors part of the CalPERS real estate portfolio); TCW/Westmark, Los Angeles; and Sentinel Real Estate Corp., New York.
Also given extensions were AMB Realty Advisors, San Francisco; AMRESCO Advisors Inc., Boston; GE Capital Investment Advisors, San Francisco; IBEX Institutional Advisors, Coral Gables, Fla.; LaSalle (for the old Alex. Brown Kleinwort Benson Realty Advisors portfolio); and RREEF, San Francisco.
Meanwhile, the decision to delegate manager hiring and firing to Mr. Gilbert was made just before the trustees' real estate subcommittee was to vote on whether to make recommendations to the full board on the termination, watch and hold lists the staff and consultant had compiled.
The delegation of authority was surprising: Most public fund boards keep the powers of manager selection and termination.
Despite his new powers, Mr. Gilbert's first order of business will be to develop a strategic plan for the fund's $5.7 billion real estate portfolio, said Brad Pacheco, a fund spokesman.
Mr. Gilbert's authority over the managers has been clearly stated. He has been given the responsibility to:
Oversee the procurement process, and make all selection and termination decisions;
Negotiate contract terms, including fees and other compensation;
Make tactical allocations within the appropriate investment committee-approved range; and
Determine the allocation of properties among advisers, portfolios and programs, including the transfer of assets.
