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Pensions 'unlikely' to restart securities lending
18 March 2014
The UK NAPF is sceptical that pension funds will return to securities lending. Paulina Pielichata reports
UK pension funds are unlikely to restart securities lending
programmes that were abandoned in the wake of the financial
crisis due to new regulatory requirements and the direction of
asset allocation trends, according to Paul Lee, head of
investment affairs at the UK National Association of Pension
Some pension funds ended their securities lending programmes
due to increased risk aversion in the post-crisis period. While
some globally have resumed their programmes, especially in the
US, Lee is sceptical about UK schemes returning to the market.
"I have not heard many schemes say that they are now
comfortable and would like to go back to the market," he said.
Some pension funds are concerned that some of the risks
associated with their programmes were not fully apparent to
them ahead of the credit crisis and there is no clear way of
managing some of these risks, according to Lee.
Lee said that if the securities lending industry wants to
encourage pension funds to return, it needs to do a better job
of convincing them that risks are effectively managed and that
compensation is sufficient to justify sacrificing the
"A lot of pension funds came to the conclusion that the money
they were being paid to give up their liquidity was not
sufficient to justify it."
The NAPF does not have a standard policy with regards to
securities lending but the association continues to support its
members in this area.
Another challenge to involvement in securities lending is the
increasing amount of illiquid assets that pension funds hold in
their portfolios, including investment in infrastructure.
"One option might be for the NAPF to work with government and
asset managers to create liquid vehicles that allow funds to
invest in tradable securities that ultimately represent
illiquid underlying assets," Lee said.
"Alternatively, the NAPF could work with regulators and the
government to relax some of the constraints to enable more
direct investment in illiquid assets."
The trend towards illiquid assets is a response to the desire
of pension funds to match their assets to their liabilities,
which are promises to pay scheme members pensions often
extending into the distant future.
Lee said: "This means a shift away from traditional asset
classes, particularly a shift away from equities. In some ways,
therefore, securities lending becomes a bit less relevant."
Pension funds typically lend equities whereas fixed income
lending is comparatively smaller, although this area is
Another factor limiting pension schemes’
involvement is a requirement for over-the-counter (OTC)
derivatives to be centrally cleared, in the European Market
Infrastructure Regulation (Emir).
Pension funds use derivatives to mitigate risks such as
inflation and their members’ longevity. Such
contracts must be collateralised with assets such as UK
government gilts and, said Lee, the new obligation is
significant and expensive.
As these assets are tied up collateralising derivatives, they
are unavailable to be used in securities lending. Collateral
held at CCPs cannot be used in other financial transactions.
"It is another way in which assets are locked up and which
takes away liquidity from pension funds," said Lee.