Bank’s £22.8m fine should bring greater scrutiny to schemes’ behind-the-scenes services

Transition management is not the sexiest of topics – and for good reason. The overseeing of a switch between fund managers or from one investment strategy to another very much belongs behind the scenes work rather than on stage.

However as with so many aspects of pension scheme management, it is the unglamorous things that matter.

At the end of January financial services giant State Street was handed a £22.8m fine by the Financial Conduct Authority (FCA) after it was found to have intentionally overcharged six clients, including pension funds, for providing transition management (TA).

Executed a deliberate and targeted strategy to overcharge certain UK TM clients and to conceal those charges

The regulator’s accompanying statement was damning to say the least. It said State Street had “allowed a culture to develop in its UK transition management business in which the interests of customers were subordinated to the generation of revenue for the firm”.

Further, the FCA claimed the business “executed a deliberate and targeted strategy to overcharge certain UK TM clients and to conceal those charges”.

TM providers can be split broadly into three groups: asset managers, custodian banks, investment banks, with differing business models.

This can of worms stays closed!

The FCA found that the London-based EMEA arm of State Street’s Portfolio Solutions Group notched up just over $20m in “undisclosed commissions and hidden mark-ups” in 2010 and 2011 after the division’s profits were hit by growing competition.

Emails published by the regulator will make for uncomfortable reading at State Street HQ:

 “Did they [legal] look at the original agreement?”

 “Absolutely not. Nor did they look at the periodic notice. This can of worms stays closed!”

“Btw – there is no way we can disclose our spread.”


Andrew Clare, professor of asset management at Cass Business School, described such “boring” but essentials services as “plumbing”. He said that although trustees don’t “pay much attention to the plumbing bits that go on in the background” it is not their responsibility.

“Pensions schemes employ their own policemen, that’s the investment and actuarial advisers, if there was a deficiency in the regulatory process they should have brought that to a trustee’s attention before now”, he said.

But Clare did concede that “it seems to be the case that since the crash malpractice will go on”, adding, “the true test of the system is that people are compensated appropriately.”

Andrew Williams, head of transition manager research in Mercer’s Sentinel service, said that the industry has had concerns that transition managers “report on their own performance”. He likened the conflict with the early days of investment managers.

It was never the intention for the charter to have teeth

“Investment managers would report their own returns, that was quickly deemed unacceptable. Independent review is now seen as the norm – that has never been the case in transition management.”

The only vaguely formal protection for investors is a voluntary code of best practice for transition managers called the T-Charter.  Signatories to the charter, including State Street, pledge not levy any fees or take any discretionary commissions other than agreed with clients at the outset.

Mercer’s Williams was present when the idea of a charter was first mooted. He said it was never the intention for the charter to “have teeth – providers didn’t want to sit on judgment on other provider”.

There is a much bigger issue of undisclosed revenue

It often takes an event – such as a multi-million pound fine – to focus minds and force change. David Blake, director of think-tank the Pensions Institute, told Pensions Insight custodians’ overcharging for transition management was just the tip of the iceberg.

“There is a much bigger issue”, he said, “of undisclosed revenue, such as retained interest on underlying cash balances or retained profits from stock lending”.

Blake said investors are aware that custodians make profits on scheme assets, but often are too small and lack the muscle to negotiate with providers. “There are only a small number of custodians, they effectively operate as a cartel”, he said.

Trustees, pension managers and their advisers better start rolling up their sleeves. As focus on the hidden costs of pensions intensifies, they will be expected to become better acquainted with their scheme’s plumbing.


Following the State Street fine, the Financial Conduct Authority published its findings of a review of transition management. It found clients routinely suffered from a lack of knowledge including the potential for conflicts of interest. The FCA also warned that TM was often a small part of providers’ overall business and seen as low-risk, leading to a lack of internal oversight. Click here to read the full findings.