EUROPE - Operational robustness is integral to investment ability and should not be seen as a separate issue, according to half of all pension funds who responded to an IPE survey on securities lending.

Over 46% of the respondents also said operational issues such as counterparty exposures were more important than two years ago when it comes to selecting asset managers.

But around 15.5% said they believed operational issues were less important than or as important as investment ability. And only two respondents deemed operational issues more important than the investment ability.

Counterparty risk, trading ability and discipline, as well as record-keeping and all round internal controls were cited as the most important operational risks by one UK pension fund.

"We [would] like to see an AAF01.06 [assurance report on internal controls of service organisations made available to third parties] or an SAS 70 [Statement on Auditing Standard 70] report," said an official at UK pension plan.

In contrast, an official at a Dutch scheme noted: "Although the final responsibility is with the pension fund, [our] operational risk management is more or less ‘outsourced' to the fiduciary manager."

Half of the 18 pension fund respondents stated that asset owners have a responsibility to ensure asset managers' resources are being directed more towards operational and asset services if they are trying to negotiate asset management fees downwards.

"Smart, expensive offices and lavish corporate hospitality are not things that I would want to pay for," reasoned one UK fund.

But another UK scheme countered: "It is not the responsibility of the asset owners to ensure where resources are directed. Asset owners should carry out due diligence in line with their own business requirements and risk profiles."

The performance of the respondents' custodian banks over the past 12 months was generally regarded as positive as more than 53% thought the performance of their custodians was good. Just over a quarter viewed it as satisfactory, while 13.5% said it had been excellent. Only two respondents perceived the performance as poor.

The survey on securities lending - to which 32 pension funds with a total of €215bn assets under management responded - was conducted for IPE magazine's September edition of Off the Record and contributes to a special focus on the securities services published in the September issue.

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