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ITEM PF16

PENSION FUND COMMITTEE – 25 NOVEMBER 2005

REVIEW OF THE GLOBAL CUSTODIAN

Report by the Head of Finance & Procurement

1. On 1 April 2003 the Oxfordshire Pension Fund appointed ABN AMRO Mellon, as its first independent global custodian, on a three year fixed contract with the option to extend this for a further two years.
2. The custodian’s responsibilities include the safekeeping of assets, the collection of income, the recovery of any reclaimable tax, the exercise of voting rights and the monitoring and execution of corporate actions in conjunction with the investment managers. The custodian also provides independent confirmation of the assets and their market value.
3. ABN AMRO Mellon’s appointment followed a restricted tender process. Psolve, who were the Council’s appointed consultants, advised that only a small number of custodians were adequately resourced to manage a large institutional pension fund and consequently only seven custodians were invited to tender. Two of these, Citibank and Brown Brothers Harriman, declined to tender on the grounds that the account was too small. The remaining five custodians who tendered were ABN AMRO Mellon, Bank of New York, HSBC, Northern Trust and State Street.
4. ABN AMRO Mellon quoted the lowest fee of the five custodians that tendered but this was not the sole reason why they were appointed. Their organisational strength, total assets under custody and real time web based services were considered to be strong points. They had also started to pick up other local authority mandates and it was felt that they demonstrated a strong commitment to the local authority pension fund sector.
5. This report considers the performance and quality of service provided by ABN AMRO Mellon and recommends that the option to extend the existing contract for a further two years be exercised.

Independent External Custody Surveys

6. There are three major and reputable annual Global Custody surveys carried out by the Global Custodian, the Global Investor Magazine and the R&M Consultants.
7. Officers obtained summaries of all three of these surveys and compared the performance of ABN AMRO Mellon with the other four custodians who tendered for Oxfordshire’s custody contract in 2003 (see paragraph 2).
8. The 2005 Global Investor Magazine’s Global Custody Survey analysed 1,046 responses from investment managers, insurance companies and pension funds regarding global custodians’ products and services, which were divided into 25 service categories.
9. Within the 25 service categories ABN AMRO Mellon was compared against the other four custodians who tendered for Oxfordshire’s custody contract and was best in 18 instances and second best in 5. As a consequence ABN AMRO was also the overall top-performing custodian in this tender peer group. Further details are shown in Annex 1.
10. In the 2005 Global Custodian Survey ABN AMRO Mellon also performed very strongly. This survey was split into three separate questionnaires covering Fund Managers, Institutional Investors and Securities Lending and included 506 responses. They were rated overall top in the first two groups and second to Bank of New York for securities lending. Further details of this survey are shown in Annex 2.
11. The third survey on global custody, provided by R&M Consultants, is based on feedback from custody clients and fund managers who judge providers across a range of criteria. The 2005 survey collected nearly 1,200 responses worldwide and asked participants to rate global custody providers across 11 categories, including client servicing and relationship management, customer facing technology, client reporting and fees. Scores were then combined to produce an overall ranking. ABN AMRO was first for the fourth consecutive year against the largest custodians, including the four custodians who tendered for the Oxfordshire contract in 2003.

ABN AMRO Mellon’s Increased Presence in the Local Authority Pension Fund Sector

12. When the Oxfordshire Pension Fund appointed ABN AMRO Mellon in April 2003, Oxfordshire was only their fourth local authority pension fund. They had previously been appointed by Hertfordshire County Council, Torfaen County Borough Council and Worcestershire County Council. It was very evident during the interview stage that they were very committed to the local authority pension fund sector and they have since been appointed by the following local authority pension funds:

Flintshire, Somerset, Avon, Aberdeen, Derbyshire, Corporation of London, Gloucestershire, Lancashire and Warwickshire.

13. The growth in the client base suggests that ABN AMRO Mellon continue to offer a highly competitive service, as evidenced in their response to Oxfordshire’s tender.

The Independent Financial Adviser’s and Officers’ Assessment of ABN AMRO Mellon’s Quality of Service

14. Since ABN AMRO Mellon’s appointment officers and the Independent Financial Adviser have met them on a number of occasions to discuss a number of issues including commission recapture, stock lending, proxy voting, investment performance measurement, cash management, transfer of the private equity custodianship and transaction cost reporting. We have always been impressed by the quality of their presentations and their desire to be as helpful and as accommodating as possible, whatever the nature of our request.
15. With regard to our day-to-day contact with them, their reporting and accounting systems are in our view very sophisticated and of a high standard. The accounting closedown procedure has been greatly simplified and enhanced since their appointment and is a vast improvement on the previous arrangements we had in place.
16. There were a few concerns with regard to their response times to queries when they were first appointed, but this situation was quickly resolved and the Pension Investments team feel that the quality of customer services is very good. Furthermore, ABN are keen to foster good working relationships and make the effort to visit us at least once a year to ensure client satisfaction is maintained.

Summary

17. On the basis of the above evidence, there is nothing to suggest that ABN AMRO Mellon will not continue to provide the most cost effective custody services to Oxfordshire going forward. Given that and the option to extend the existing contract, there seems to be no reason to make an additional expense now in going through a re-tendering exercise.

RECOMMENDATIONS

18. The Committee is RECOMMENDED to exercise the option to extend the custody contract with ABN AMRO Mellon at 31 March 2006 for a further two years until 31 March 2008.
    
    

SUE SCANE
Head of Finance & Procurement

Background Papers: Global Magazine Global Custody Survey 2005, Global

Custodian Survey, R&M Custody Survey.

Contact Officer: Tony Wheeler, Pension Fund Investments Manager (01865) 815287

November 2005.

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