Exclusive: Frank Field MP: Custodians “behaving as mini-Maxwells”; pension fund “received South American bonds for UK gilts”

GSL Exclusive: British parliamentarian Frank Field MP has accused custodians of “behaving as mini-Maxwells” after speaking to a pension fund trustee who claimed its custodian had admitted to lending securities in both a segregated and pooled fund “without permission” and had provided South American bonds as collateral for UK gilts borrowed from the pension.

Hear the interview by clicking here.

Field’s warning that custodians are following former media magnate Robert Maxwell’s pension fraud came as the Pensions Regulator issued new guidance on securities lending to the UK pension industry.

A statement from the Pensions Regulator (available here) claimed: “Situations have been brought to our attention of scheme assets being lent by fund managers on schemes’ behalf without full awareness on the part of the trustees, with fund managers retaining the majority of the investment return despite the scheme retaining all the risk, and with inadequate collateral in place to cover this risk.”

The Pensions Regulator refused to comment on whether its new advice to pensions was as a result of specific examples where securities had been lent without permission, rather than issues over trustees’ understanding. Indeed, a report by the Pensions Regulator in November 2009 stated that just six out of 10 trustees believed their board’s collective understanding of fundamental investment matters was “very good”.

The International Securities Lending Association (ISLA) has been working with the Financial Services Authority on its review of securities lending and has sought to educate pension funds and other beneficial owners about good practice and the potential risks involved. ISLA chief executive Kevin McNulty responded to the new securities lending guidance by telling GSL.tv: “We are in the process of trying to set up a meeting with the Pensions Regulator because we would like to help them with their guidance materials for trustees and to find out more about the examples that prompted their paper.”

The regulator’s statement referred to assets being lent by fund managers, which is far less common than custodian lending, and at odds with Field’s comments about custodians. However, Field, while acknowledging that pension trustees should be able to take part in securities lending programmes if they wish, believes that the regulator’s advice shows that the case he has seen is not isolated.

“There is all the difference in the world between pension fund trustees saying ‘we will indulge in this activity’ and this happening without their knowledge. The regulator wouldn’t have issued this guidance if it didn’t think this was widespread,” he said.

McNulty said that it “is very unlikely” that there could have been a failure of communication on the custodian side which had allowed the securities to be lent without permission, although “you couldn’t rule anything out, because we don’t have enough information”.

He continued: “Without knowing the specifics one can only speculate. It’s possible that pension trustees may be unaware of securities lending arrangements that had been put in place by their predecessors. These agreements tend to be-open ended and for many pension funds were probably signed several years ago or more. There could well have been some turnover among the people who are responsible for overseeing that fund’s assets.

“Given though that there would have been reporting of lending activity and income it’s still hard to believe that the trustees didn’t know about any lending of any direct investments.” This comment is backed up by Field’s quotation of the fees being earned by the fund. Clearly, if the fund was earning securities lending fees but did not know that it was in a lending programme, alarm bells should have been going off.

Field – who has in the past been a vocal critic of the short selling of pension funds’ assets - told GSL.tv that in the specific case he had been made aware of, “there was no question” of an agreement having been put in place before the existing trustee had been employed by the fund.  “I don’t know how long the programme had been going on, or whether the person was new in his post and decided to have a root and branch look at everything, but the custodian has admitted that it didn’t have that permission.”

Custodians must have permission to lend securities from a fund, whether it be in a segregated account – where they have “no legal authority for the custodian to lend the securities if the pension fund had not signed an agreement”, according to McNulty – or a pooled account, where the permission is less explicit but would still be contained in the overall documentation made available to investors.

However, according to Field, the pension fund he spoke to had seen securities lent from both its segregated and pooled funds – both of which were controlled by the same custodian. The trustee is now in a “battle” with the custodian, Field said, adding: “The chairman had to fight to get this information. The custodian did not divulge this information easily.”

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