third party holding assets

[ST6_aspirant]

April 2010 paper 2 qn 5 (ii)
examiners notes mentions:
If third party holds the assets of the scheme, failure of counterparty can affect asset proceeds, or more usually, how easy it is to access the assets

Could you explain:
why assets of a scheme are held by a third party? what about holding the assets is so difficult that the sponsor cannot do it?
when they say counterparty above, do they mean the third party holding the assets?
or do they mean the company from whom, for example, the corporate bond was bought.

I am not sure about the incidents that occur in the statement above. probably needs a slightly detailed explanation. Thanks!!

 

[Lindsay Smitherman]

The "third party" mentioned here is a custodian. There is more about the duties and purpose of a custodian in Chapter 27 of the course notes (e.g. see question 27.7).

There are various reasons why a custodian might be used: e.g. it might be a regulatory requirement, particularly for certain types of asset, or it might depend on the nature of the assets held (e.g. might be appropriate if large overseas holdings), or it might depend on the nature of the scheme (e.g. very small pension scheme, or one which has been wound up). A custodian may be used to benefit from the expertise that they provide in relation to administering investments.

The counterparty referred to in the sentence that you have quoted is the custodian. There is counterparty risk arising from the fact that the scheme is reliant upon the custodian. For example, if the custodian gets into financial difficulties then it may become difficult for the scheme to access its assets.

Hope that makes more sense.

 

[ST6_aspirant]

That made perfect sense. Many thanks!