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UK pension funds saved from short-selling reform

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  • UK pension funds saved from short-selling reform

UK - A proposed amendment to the UK Financial Services Bill 2009-10, which would require pension schemes to give express permission for their funds to be lent for short-selling purposes, has has been withdrawn after MPs described it as "blunt and inflexible".

Former pensions minister Frank Field MP tabled an amendment to the Bill following concerns that pension fund custodians are "gambling with assets committed to their safekeeping".

Field revealed in a blog last week he had been contacted by the trustee chairman of a medium-sized pension fund who had found the scheme custodian, said to be a high street bank, had been lending the shares and gilts owned by the fund without its knowledge for short-selling purposes. The scheme had then been given gilts from "fourth-world" countries as collateral, which Field claimed would "have proved almost valueless had the bank gone under and the pension fund tried to sell the replacement assets".

In his speech in the House of Commons yesterday, Field changed the proposal to a probing amendment as he received of a lack of support from MP. However, he argued the debate should "specifically address the question whether we need to consider further - perhaps not here today, but in another place - how we can better protect our constituents' assets that are wound up in company pension schemes".

He claimed the example of a scheme's assets being lent without trustee's permission was worrying on its own, and added: "However, my guess is that it does not stand alone, and that other funds have had their shares and assets lent without their permission, risking the life savings of the company concerned and the members of that company's pension scheme. I wonder whether we need to consider putting a lock on what custodians can do in that regard."

The actual amendment proposed that the Financial Services Authority (FSA) should prohibit short-selling of shares unless either:

the share price at the time of the transaction was higher than it was at the close of the previous trading day of the market on which the share was listed; or the short-selling was by a person who borrowed the shares, and the beneficial owners of the shares had given prior permission at an annual general meeting for the shares to be lent.

MPs rejected the amendment and argued the clause would restrict liquidity in markets, while not directly addressing what they perceived as a corporate governance issue.

Conservative MP Andrew Tyrie argued Field's proposal "uses a machine gun to try to hit one very specific target. It is inappropriate and would cause a lot of collateral damage, as machine guns tend to do when trying to hit only one target". He also highlighted the possibility that such a ban could then be extended to other pension fund assets such as corporate bonds.

Mark Hoban, Conservative shadow financial secretary to the Treasury, also argued that a number of pension funds benefit from the strategy of lending stock for short-selling "because they have investments in hedge funds that engage in such activities. At the peak of trading in 2008, pension funds apparently earned about £600,000 a day from the fees that they received in return for lending their stock".

This argument was countered by Field who claimed that in his example the medium-sized pension fund was paid only £900 for every £1m of stock that was lent. In his retort, Hoban added: "The fact that the trustees did not know what was happening suggests that more due diligence should have been carried out in respect of the nature of their agreement with their investment manager and the custodian."

Field admitted there is an issue regarding corporate governance but added: "The problem is wider than that. I approach this matter with the view that short-selling - gambling with people's futures - is not necessarily a good activity, even if that activity is draped under the guise of liquidity".

But Ian Pearson, economic secretary to HM Treasury, argued that short-selling is an important source of liquidity and Field's measures would be "blunt and inflexible" by prohibiting the majority of short-selling activity.

On the issue of corporate governance he noted Lord Myners, the financial services secretary has "commissioned an informal review of stock lending, and any further safeguards that might need to be recommended to stock lenders, including pension funds, would be considered as part of that".

The tabling of the amendment coincides with the publication earlier this month of The Pension Regulator's (TPR) updated trustee guidance on securities lending, which includes making sure trustees are aware if their fund managers are lending assets.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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