January 19, 2010 2:00 am
Retirement scheme trustees are being urged by the Pensions Regulator to review the terms under which their fund managers loan stock for a fee.
The regulator made the move after becoming aware that stock was being loaned without trustees' knowledge or consent.
In guidance issued earlier this month, the regulator offered assistance to trustees confronting the practice, which fund managers and custodians can use to enhance returns to the scheme, or keep proceeds of the loan fees themselves.
The regulator began investigating the practice after being contacted by Frank Field, MP, among others, who said it had been brought to his attention by the chairman of a mid-sized pension fund.
Mr Field said the chairman's scheme had discovered the stock loans by accident. He wrote on his blog: "Unknown to the trustees the (custodian) 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."
He was concerned about the quality of the collateral received by the scheme from those banks borrowing its shares.
He said: "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 minuscule. Some figures cited to me were a return of £900 in every £1m lent. The bank, I believe, was pocketing practically the whole of the fee it gained from lending out the pension fund shares."
In its guidance, the regulator noted that stock lending may improve returns for pension schemes by providing fee income. The practice is widespread and is viewed as one measure to help markets run more smoothly.
Mr Field said he first raised concerns with the Financial Services Authority about share lending as he fearedpension scheme shares were being used to aid short selling of bank stocks. The effects of that, he said, drove down pension scheme asset values.
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