Frank Field MP
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Being pulled up short

18
Jan
In May, I expressed my worries to the Pensions Regulator that the pension fund custodians, far from protecting pension funds, were gambling with assets committed to their safe keeping. In December the Pensions Regulator reported back to me on their survey of Trustees and on Friday published a statement accepting the need for much more stringent control on the safety of fund and therefore pension assets.

Robert Maxwell "borrowed" assets from the pension funds of the firms he owned and failed to repay them plunging funds into crisis. Parliament responded by establishing custodians of funds so that no owner could misuse the assets of pension fund members. Some custodians are clearly running rings round safety measures Parliament put in place which have probably resulted in pension fund losses.

The specific case I referred to the Pensions Regulator was of a medium size pension fund that was using a high street bank as the custodian for its pension funds.

Unknown to the Trustees the bank was lending out both shares and gilts owned by this pension fund. In spite of current pressures on UK gilts, they are one of the safest bets in the world. In return, however, the pension fund was being given gilts from third-world countries which, while they had the nominal value of the UK gilts, would have proved almost valueless had the bank gone under and the pension fund tried to sell the replacement assets.

Pension funds were being paid for the risk of lending their assets but the returns were miniscule. Some figures cited to me was a return of £900 in every £1M pounds lent. The bank, I believe, was pocketing practically the whole of the fee it gained from lending out the pension fund shares.

I also asked the Pensions Regulator to refer to the FSA a practice which I thought was going on whereby the pension custodian was lending assets to its own bank so that they could appear on the bank's asset register so that in this way the bank would be meeting FSA asset requirements although not owning the assets themselves. The Pensions Regulator's and the FSA's letters are attached.

That new guidance is coming into place shows the Pensions Regulator is concerned about the safety of pension assets. I believe these regulations should be mandatory and have tabled an amendment to the Financial Services Bill currently going through Parliament. Lord Vinson has echoed this amendment in the Lords providing cross-party and cross-legislature action to protect the safety of pension fund assets.
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Stock lending is a useful avenue for idle assets. Pension funds can generate £millions in fees provided they worry about the risk. Revenue from stock lending should more than cover their custody fees.The risk is not with the stock lending but with the cash taken as collateral. The impression is that if you have the collateral you have eliminated your risk from lending the securtities. Not so - this is where the pension funds came unstuck. The cash taken as collateral was invested in mortgage backed securities and other junk that was obviously offering better returns than cash deposits with high street banks. Pension funds bought into the high returns from the cash reinvestment programmes without understanding what the risks were. Suppose you have a pension fund of £1 billion. Typically you would lend 20% of your portfolio and take cash as collateral - so £ 200 million was being invested on a discretionary basis by their custodian. The pension fund takes great care in investing in stocks and bonds and then blindly allows 20% of their portfolio to be invested in junk bonds.Worse still the Americasn custodians re-invested the cash in non-regulated cash conduits - where the pension fund was European, whilst for American based funds they have to re-invest in regulated 2A7 funds - clearly an unlevel playing field. When I mentioned this to CESR (Committee of European Securities Regulators) they we greatly uninterested.(This is similar to American deposits with American banks being protected by deposit insurance whereas European depositors are merely unsecured creditors).Securities lending is worthwhile provided you use the correct channels.
Comment by Anonymous on 15 Jul 2011


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