Pension funds 'gamble' with stock loans

21 January 2010 12:00 pm | By Hannah Stodell

TPR has issued guidance for more stringent controls on stock loan conditions following Field’s warning after the Labour MP was tipped off about the practice by the chairman of a medium-size pension fund.

In a recent blog, referring to the case of a pension fund that was using a high-street bank as the custodian for its pension funds, Field expressed concern about the collateral that the funds were getting in return such as gilts from countries in the developing world.

He said: “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.” Field said in some cases banks which run the funds have been taking the fee earned from loaning the stock without giving a share to the pension fund.

In its guidance, TPR says: “We have noted concerns expressed in the pensions community of the risks to scheme assets from the practice of ‘securities lending’. Situations have been brought to our attention of scheme assets being lent by fund managers on schemes’ behalf without full awareness on the part of the trustees, with fund managers retaining the majority of the investment return despite the scheme retaining all the risk, and with inadequate collateral in place to cover this risk.”

TPR says it has provided scheme trustees with specific questions to ask fund managers to assess these potential risks.

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