UK - The Pensions Regulator has urged scheme trustees to review their securities lending practices.
The watchdog said it had issued guidance on securities lending - which involves investors lending securities for a fixed period in exchange for a fee and collateral to cover the loan - after it became aware of situations where scheme assets had been lent out by fund managers on behalf of the pension scheme without full awareness among trustees.
It said this lack of awareness had also led to fund managers retaining the majority of the investment return - despite the scheme retaining all the risk, with insufficient collateral placed to hedge the risk.
This issue has also been raised by MP Frank Field.
In a blog posting yesterday, Field said he expressed his worries to the regulator that pension fund custodians were "gambling with assets committed to their safe keeping".
He said: "Some custodians are clearly running rings round safety measures Parliament put in place which have probably resulted in pension fund losses."
He cited a specific case to the regulator concerning a medium-sized pension fund using a bank as custodian. The bank was lending out the pension fund's shares and gilts, which was unknown to the trustees.
However, Field said in return for this lending, the pension funds was receiving gilts from third world countries which although equaled the nominal value of UK gilts, had higher default risk and would have proved valueless had the bank collapsed.
Field added: "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 (US$1,471) 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."
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