Why Your Custodian Matters

When choosing an endgame strategy there is one provider that is going to have a role to play in every possible approach you land on: your asset servicing partner, or custodian. Whether you have opted for some form of continuation strategy or an insured risk transfer, be that a longevity swap, buy-in or full buy-out, the custodian is critically important to make the transaction smooth, painless and efficient. Importantly, this requires engagement and an understanding of the process and the lead times involved by all parties.

The key and first consideration is early engagement: just as the endgame decision takes time to research and execute, the support of the custodian also needs planning. Early engagement with the relationship team can help smooth the path significantly. De-risking transactions are increasingly common, so you will find that the relationship team has almost certainly supported transactions before and will be able to take you through the steps required, laying out a timeline and managing the asset side of the project effectively for you and your advisers.

The key considerations

Transaction date: While it seems almost counter-intuitive to start with the end (your proposed transaction date), planning back from this point is essential as it will drive the timeline and many of the milestones. By their nature, most de-risking transactions require some form of asset transfer and even reshaping the portfolio for a run-on approach will involve asset sales and changes to the account structure. While all custodians have a specialist transitions group with expertise in managing the process, a transition date needs to be agreed between the counterparties involved, even if this is the same custodian for both your assets and the insurer. This date can often be a month or two away, depending on workload and considerations such as period ends and asset types. So locking in the date in advance is essential to ensure the transaction goes smoothly. Many custodian agreements include confidentiality provisions, which may assist in protecting information relating to a proposed transaction. The extent of that protection will depend on the terms of the relevant agreement.

Communication: Once the date of the transaction is known and all the parties are engaged, a regular call or meeting is essential to ensure there are no last-minute issues and that all the milestones are met. Your advisor will typically chair these calls and run the project with input from the various other providers. In our experience these calls can be fairly short and are best held weekly for insured risk transfer transactions, with more flexibility where the transaction is in respect of run-on or a transfer to a superfund.

Legal and operational documents: legal negotiations always seem to take longer than expected and depending on your transaction could involve a significant amount of time and effort to finalise. At the simpler end, for example some form of run-on, there will be no real legal work involved, however, activities like a change of manager/s would require new Investment Management Agreements which in turn drive new account openings, changes to performance benchmarks and internal asset reallocation at the custodian - all of which have a lead time. In a lot of the insured transactions there will be similar considerations around accounts and managers; but in some, particularly longevity transactions, there are a number of new legal agreements necessary. A typical longevity transaction will require an Account Control Agreement (ACA) between the insurers and the custodian plus a Collateral Agreement. Neither of these is complicated, but as with the ACA in particular there are three counterparties - that means three sets of lawyers at least.

Assets: There will be a process whereby the assets will need to be reviewed and those in scope identified. Sometimes this process can be most effectively achieved using a transition management service (outlined below in more detail). If a transition management service is not used, the asset lists will need to be agreed as an instruction to the custodian as part of the overall process. A key role of the transition team at the custodian is to follow up post-transfer to ensure deliveries settle, and then to manage any outstanding entitlements such as dividend, income and tax reclaims, which can take many months or even years to finalise.

Transition management: Transition management can aid a pension scheme entering a bulk annuity transaction by helping trustees reduce execution risk, improve price certainty and enhance insurer optionality. Transition management, in this context, is the disciplined planning and execution of asset changes - such as rebalancing, de‑risking, or funding an insurer premium. It focuses on ensuring assets can be delivered to an insurer with efficiency and flexibility during the period leading up to and through a buy‑in or buy‑out transaction. The viability of asset transition will depend on the size of assets, region and asset class. For transitions exceeding £100 million, it may be appropriate to assess whether a transition management service could provide a more efficient approach, depending on the circumstances and objectives of the transaction.

In advance of insurer engagement, transition management supports disciplined de‑risking by managing market timing, costs and liquidity as growth assets are reduced and portfolios simplified. It helps trustees stress‑test how premiums would be funded in practice, ensuring assets can be liquidated or transferred within insurer settlement timelines without forced selling or operational disruption.

At early stages of insurer discussions, transition management provides practical insight into which assets may be acceptable in‑specie, where rebalancing costs are likely to sit and how market and foreign exchange risks can be managed between pricing and settlement. By compressing execution timelines, managing transition‑period risks and allowing trustees to respond flexibly to differing insurer structures, transition management underpins deliverability and reduces operational risks, supporting better outcomes while maintaining trustee governance, control and oversight.

Post transaction: When the transaction is complete and the risk transferred, the asset mix will look very different to when the exercise began. At this point it is worth considering how the relationship with the custodian will look: what will the new fees be, how will the insurance policy be reflected in the portfolio, how will this be reflected in the Statement of Recommended Practice (SORP) and on the Office for National Statistics (ONS) return and more fundamentally, whether your custodian is willing to support a significantly reduced asset base?

Regardless of your preferred endgame, your custodian is a key part of the de-risking journey. Bringing them into your discussions early can not only help smooth the operational path to your chosen endgame, but could also add significant value.