Do you make use of securities lending?
Stopping and starting
MEPs’ Pension Fund
Pension fund chairman
• Invested assets: €180m
• Members: around 1,100
• DB scheme
• Date established: 1989
• Funding level: around 70% (Dec 2009)
We started our lending programme several years ago but in 2008 when the financial crisis struck we decided it would be prudent to stop. A lot of discussion surrounded the shorting ban and as the European Parliament Fund we couldn’t be seen to be doing things that were perceived as being seriously out- of-line with market or political sentiment.
Earlier this year we restarted our stock-lending programme.
The main reason for our return was that our custodian, Crédit Agricole, assured us that it would give us some rock-solid guarantees and post the collateral, which meant that it was now bearing the risk, whereas before the risk was more evenly spread between us. In other words, the fund is now able to generate money with basically no risk. Of course, we split the stock lending fees with Crédit Agricole in a way that was mutually agreeable.
We only use equities for our lending programme. There is no limit on how much we lend, although we have never lent more than about 15-20% of the fund. What stocks exactly will be lent is decided by Crédit Agricole. Obviously, for us to lend someone must want to borrow. There are two basic reasons for borrowing: one is to receive a tax advantage on the dividends, which we cannot get, and the other one is to short.
But since the financial crisis, demand for borrowing stocks, particularly in order to short, has cooled down although we believe it might pick up again. A contributory factor to the more subdued demand is the new criteria we agreed with Crédit Agricole, which may have led to them lending much more cautiously because it has moved more of the risk onto them. In other words, Crédit Agricole is taking a risk on its share in fees. However, in all the time we have been lending, even through the crisis, we never had a problem with the collateral. As Crédit Agricole is France’s second largest bank and as a co-operative has a different structure of ownership we have no concerns at the moment.
The collateral is reviewed regularly and we receive regular and frequent reports. All the stock lent has to be fully covered at all times, meaning if stock is lent the collateral has to be reviewed.
Henrik Olejasz Larsen
• Danish common management company for three pension funds
• Net invested assets: DKK111bn (€14.9bn)
• Members: 300,000
• Defined contribution scheme with guaranteed life annuities
• Date established: 1945
At the moment we do not have a stock lending programme in place. We changed our custodian bank last autumn and would like to have our processes with the new custodian to be more established before we complicate matters with securities lending. We have spoken about the topic with the new custodian but have yet to discuss any details.
It is something we have looked into before but under the old custodian we did not manage to implement it due to complications of the institutional set-up. Our listed equities are managed through Danish mutual funds of which we are the sole member. However, they are administered by a third party and therefore several parties have to be involved in setting up a lending programme.
But we do use the repo market in Danish and European listed bonds, which are managed internally, so in that context we have already been using securities lending for many years.
We will most likely pursue it properly in the future because, while our current portfolio of listed equities is fairly small, it is going to grow as clients are moving into new pension products that have a lot more risk capacity and a larger allocation to listed equity.
Most of the financial elements involved in securities lending can be handled by us but a primary concern is to have flexibility in the management of market risk. But derivatives solutions are now so advanced I do not consider this to be a major obstacle. We are used to handling collateral in almost all situations and have used swaps and swaptions to a very large extent in managing our fixed income interest rate risks. We also use futures and other equity derivatives so it is unlikely we would have an issue with collateral on our securities lending programme that could not be solved.
As of today, securities lending is not that widespread among Danish pension funds because the income has to be of a certain size before it becomes a net benefit, as it involves administrative hassle.
The 2008 discussions about a ban on financial shorting have not influenced our position on securities lending. Some pension funds may have issues with their social responsible investment (SRI) policies, for example, if they are required to vote in certain companies, but we could live with that burden under our SRI policy.
Stichting Pensioenfonds Vopak
• Invested assets: €630m (including €64m
• Solvency ratio: 106.2% (as of July 2010)
• Participants: 6,000
• Hybrid plan with DB (average pay) up to a salary of €50,000 and DC for the salary part above this amount
• Date established: January 2002 (through the merger of three pension funds)
We had been undertaking securities lending for around 10 years before we stopped it in August. Over a decade ago it was brought to us as an additional return without risk. Of course, the financial crisis showed that risks are involved, but 10 years ago they were very limited.
The last tranche of securities lending in our passive mandate has just ended. Our euro equities contained some restrictions, meaning we were not able to get rid of the securities lending within that portfolio. But our passive asset manager lifted those restrictions and as a result we terminated securities lending.
However, that does not mean that we are not going to undertake securities lending again. We will probably look at it from another perspective though, particularly with regard to risk management.
There is no guarantee that we will enter the market again but it will probably be a discussion point in the investment proposal for 2011.
While the passive asset manager was responsible for securities lending in our passive mandates, our former fiduciary manager undertook the lending programme in our active portfolio. We used to lend both equities and bonds - we had a long bond portfolio, which we used for securities lending, as well as our equity portfolio in Europe and North America. The amount that could be lent was at the discretion of the fiduciary manager.
The securities lending programme in our active portfolio stopped when we changed our fiduciary manager in spring 2009.
We were not affected by negative returns with respect to securities lending. All our collateral was very well placed, posted daily and we therefore did not lose any money with our securities lending. Nevertheless, the risks that popped up during the crisis made us review it. Before we enter the market again we will now have to have the full picture about the risks and how we are going to manage them.
A lot of Dutch funds used to have a securities lending programme but have re-evaluated it - and many of them, like us, have downgraded or stopped it altogether.