Large-scale securities lending by Switzerland’s pension funds will probably be impossible under legislation requiring the schemes to exercise their shareholder rights, the industry has been warned.

Florian Zihler, a lawyer working at the Ministry of Justice (BJ), said he acknowledged that pension funds were financially compensated for lending out parts of their portfolio and therefore benefitted from it, but added that the activity could not be used as a reason for domestic funds to fail to vote at the AGMs of domestic firms.

His comments come after the Swiss public last year overwhelmingly voted in favour of the Minder Initiative, requiring a change to the country’s constitution.

The resulting law on excessive executive pay (VegüV) also requires the country’s pension funds to vote at the AGMs of companies either headquartered or listed in the country.

Speaking at the Innovation Second Pillar conference in Lucerne earlier this week, the question was raised whether funds should be forced to rewrite their lending agreements so their securities are with them during the AGM season.

When a security is with the borrower, the lender cannot use it to vote.

Barbara Heller, managing director of proxy advisory SWIPRA, said she believed those funds that wanted to ensure they could vote should not lend.

“If you want to be sure you can vote at AGMs, then you mustn’t be involved in securities lending – but the law does not forbid it,” she told delegates.

Speaking in a personal capacity, Zihler added that he did not view large-scale securities lending as compatible with VegüV, saying it was important to avoid a situation where pension funds were seen as “systematically” trying to circumvent voting requirements by lending their holdings.

“You can’t say that if you have leant some or a part of the shares, potentially over a longer horizon, that you won’t be forced to recall the shares ahead of an AGM,” he said.

However, Dominique Biedermann, chief executive of Swiss proxy voting foundation Ethos, stressed that pension funds should not be lulled into a sense of false security over engagement, believing that their only role was to cast votes.

“The most important thing is not to attend the AGMs, but in advance to engage in a dialogue with the companies and, potentially – it is not impossible – to organise a campaign ahead of the AGM to communicate one’s concerns.”