Bank of New York Mellon: Mapping the Regulatory Maze - Kerry White

As their investment strategies become more diverse, pension funds face the complexity of an ever-changing regulatory environment. Kerry White from the Bank of New York Mellon maintains that this complexity and ongoing drive for greater transparency means pension funds must rely more on the advice of their service providers. She shares her perspective with FDE.

Pension fund investment strategies are under ever more intense scrutiny and regulators have acted to ensure greater transparency within the sector. The ensuing tide of regulation is well intentioned, but creates many challenges for pension funds.

The main problem arises from the different criteria regulators have adopted for assessing funds’ status, and though funds themselves have a strong desire to remain compliant, the sheer complexity of global regulation causes them concern.

‘The challenges are a neverending story. We expected greater convergence of pensions regulation, but regulators around the world now have very different requirements. It has been two steps forward, one step back,’ says Kerry White (pictured), first vice president of multinational business development for Bank of New York Mellon.

Pension funds are a key strategic market for Bank of New York Mellon, where asset servicing has been a clear driver of growth. Its scale and global reach have established it as a key advisor to pension funds, and it invests heavily in technology and services to support information delivery and reporting. In doing so, it has helped its clients tackle the different methods used to review assets and liabilities. White has first-hand experience of the complexity of global pension fund regulation, and notes the fragmentation even in integrated markets.

‘Change is a slow-go, and even European markets are not fully unified as there are still authorities making decisions at a local level.’

She states that regulatory changes that seemingly affect only one market can have much wider impact as pension funds look for clear standards by which to judge the status of multi-jurisdictional portfolios. There is growing adoption of US-type standards, which push for transparency and demand more detailed information.

Nevertheless, multi-nationals still face the task of extending the applicability of such standards to global assets.

‘Convergence among regulators would help, but we have a front row seat in the pensions arena and where we do see convergence is among investors, who are embracing what we would once have called ‘exotic’ assets like derivatives and private equity. Pensions funds are moving away from their long-only strategies and into areas more familiar to hedge funds,’ says White.

The demands of diversification

Industry groups have estimated that alternative investment strategies could account for $1 trillion of invested assets by 2010. Pension funds increasingly wrap derivatives around investments to boost returns, use swaps for exposure to specific sectors, put money into private equity, invest in emerging markets and blend short and long positions. This shift of focus is changing the nature of their demands on their banking partners.

‘These exotic strategies are more accepted on Main Street and require more complex models to support them. Pension funds want more downstream support for end-to-end management of their investments. Consequently, they demand better, more frequent information on their portfolios and calculations of performance, so banks are no longer just executing deals, they are providing more detailed analysis.’

The burden is on service providers to support more sophisticated investment strategies like Bank of New York Mellon’s online portal. Also, they need the global infrastructure and clear measures of success to account for the differences in global regulation.

‘The pensions market in particular is built on shifting sands. There is always concern about funded status and volatility of that status, which is refective of today’s investment climate and greatly worries pensions directors and CFOs. We need everyone to get together – sponsors, regulators and service providers,’ believes White.

As the industry waits for clearer global regulations the pressing need is to find the advisors with the scale and the skills to handle exotic asset classes within global investment portfolios.