SWITZERLAND – Swiss pension funds have largely abandoned the securities lending market due to "unattractive" risk/reward ratios since the onset of the financial crisis and the misalignment of interests between lenders and borrowers.

Speaking with IPE, Jean-Pierre Steiner, director of the Caisse de prévoyance du personnel des établissements publics médicaux du canton de Genève (CEH), listed several reasons why his scheme – which will merge with the Caisse de prévoyance de Genève (CIA) in January 2014 – decided to drop its securities-lending programme.

He said the market currently suffered from a "misalignment of interests" between pension funds, which have longer-term investment views, and borrowers such as hedge funds, which largely base their strategies on short-selling.

"The use of securities lending would lead us to create risk-management solutions that come in direct opposition to what our scheme really wants to achieve," he said.  

Steiner also pointed to conflicting interests between pension funds and security lending agents, which "participate in the earnings but not the losses" and often push schemes to take more risks than they wish.

He also pointed out that the securities lending market currently offered no voting rights to lenders.

"This is one of the main issues at the moment," he said.

"Pension schemes have no voting rights in the securities lending market, which goes against the new Swiss regulation on excessive corporate remuneration that came into force in March and obliges schemes to exercise their voting rights."

Under the agreements set between a lender and borrower in the securities lending market, once the securities have been lent by the pension fund, the scheme effectively retains all benefits of ownership, apart from voting rights.

Steiner also cited the "relatively low" risk/return profile of the market, as well as counterparty risk and reinvestment by borrowers, which proved costly for lenders in 2007-08.

Market turbulence over the period, particularly after the collapse of Lehman Brothers, served to remind lenders the importance of accepting collateral that best matched their requirements and risk strategies, something many European pension funds failed to do prior to the crisis and led to significant losses.

This, in turn, led many pension funds lending into the space to suspend their securities lending programmes.  

Andres Haueter, head of asset management at the Swiss post pension fund, said the market no longer suited his scheme's needs.

"Our pension fund has not used the securities lending market since 2008," he said.

"The returns provided by such transactions are way too low compared with the risk taken."

Haueter added that, considering the Swiss post pension fund seeks to avoid tail risks in asset classes such as equities, it would be "inconsistent" to take similar risks in the securities lending market.

His comments reflect a Swisscanto survey conducted earlier this year, which found the financial crisis had forced Swiss schemes to "rethink" their approach to securities lending, with many realising the "supposedly risk-free and temporary lending of securities" posed "hitherto unconsidered risks".

"Surveys on this issue show that smaller pension institutions have now largely withdrawn from securities lending and that many of the larger funds with more than CHF1bn (€810m) in assets have also given up a significant part of this business," Swisscanto said.

Another Swiss pension fund, the Caisse de Prévoyance du Personnel de l'Etat de Fribourg (CPPEF), told IPE it had no intention of launching new securities lending programmes in the near future.

Claude Schafer, director at the CPPEF, said the scheme stopped its securities lending programme in the mid-1990s, when the fund decided to invest in equities.

"The executive board in charge of the CPPEF took the decision at the time to withdraw its securities lending programme, and the scheme has decided to stick to it since then," he said.

"The events of the past five years have proved this decision was wise."

Topics