TPR issued guidance to scheme trustees to make them aware of the practice following a warning by Labour MP Frank Field who was tipped off about the issue by a fund chairman.
Field warned in a recent blog that unknown to trustees, custodians were lending out gilts and shares owned by the pension fund and he was concerned about the collateral that the funds were getting in return – such as gilts from third world countries.
Field also pointed out that in some cases the banks which were custodians for the funds were taking the fee earned from loaning the stock without giving a share to the pension fund.
In his blog field says: “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.”
Field says that where pension funds are rewarded for the risk of lending assets, this is often by a “miniscule” amount.
He says: “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.”