UK - The National Association of Pension Funds (NAPF) has criticsed the certification process used by ratings agencies, saying it allows certain assets to enter a pension scheme's portfolio through the "back door".

Questioned last week with by the House of Commons Treasury select committee on the role of credit rating agencies with regard to commercial mortgage-backed securities (CMBS), chairman Mark Hyde Harrison said that the UK pension industry did not, at the time, have any "material" exposure to such holdings.

He told the committee that UK pension funds were aware of the problematic nature of structures such as CMBS and how they were rated.

"I think our members could see in the marketplace that the yields on those sorts of instruments were higher than other high credit-worthy instruments, which indicated there were risks."

However, he warned that the nature of the credit rating system often allowed certain products to enter a portfolio simply by virtue of an investment management agreement 

"Credit ratings agencies, in giving ratings to different types of structured instruments, [do] sometimes present a back door to allow our investment managers to invest if we're not careful.

"What's difficult for them is if a different structure appears in the market which then gets rated AA and if they have many managers and the manager says 'ah, my investment management agreement allows me to invest in this structured product' and doesn't come back to the client and make it clear what they are doing," Hyde Harrison warned.

He said the NAPF was "quite alive" to new types of debt structures and how rating agency certification could allow the structures to enter a scheme's portfolio if there wasn't an "explicit agreement" between manager and the fund.

The association's chairman was not critical overall of the role played by ratings agencies, noting they served a "very important purpose" in defining the bond market.

However, he said: "There is a question of if they have the right regulatory controls, like a listing authority has, in terms of who has access to the market.

"If you lose that trust and you list everything, give credit ratings to everything, the investors will no longer invest in that market," he added.