MP Associates Custodians With Robert Maxwell

Frank Field, MP for Birkenhead and former pensions minister, has associated the securities lending practices of custodians to the activities of Robert Maxwell, former MP for Buckingham, and pension fund embezzler
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Frank Field, MP for Birkenhead and former pensions minister, has associated the securities lending practices of custodians to the activities of Robert Maxwell, former MP for Buckingham, and pension fund embezzler.

In his blog, Field said: Robert Maxwell “borrowed” assets from the pension funds of the firms he owned and failed to repay them plunging funds into crisis. Parliament responded by establishing custodians of funds so that no owner could misuse the assets of pension fund members. Some custodians are clearly running rings round safety measures Parliament put in place which have probably resulted in pension fund losses.

Maxwell stole 440 million from the Mirror Group, of which he was proprietor.

According to Field: The specific case I referred to the Pensions Regulator was of a medium size pension fund that was using a high street bank as the custodian for its pension funds. Unknown to the Trustees the bank was lending out both shares and gilts owned by this pension fund. In spite of current pressures on UK gilts, they are one of the safest bets in the world. In return, however, the pension fund was being given gilts from third-world countries which, while they had the nominal value of the UK gilts, would have proved almost valueless had the bank gone under and the pension fund tried to sell the replacement assets.

As a result of Field’s tip-off, the Pensions Regulator has issued a statement entitled Understanding and managing the risks of securities lending, suggesting some specific questions pension funds should consider and address with fund managers.

For Kevin McNulty, CEO of the International Securities Lending Association, it clearly would not be a good thing if the case were true. However, McNulty has his doubts. Our sense is the industry broadly has become very risk averse in how it does business, he explains. We did our own survey last year amongst our members and found that by and large, everybody had tightened their risk parameters on the types of collateral they would accept, the amounts they would loan to counterparties, and we haven’t sensed from our membership that there has been any slackening of those arrangements. Field mentioned a pension fund taking on third world debt bonds, that would be a surprise to us if that happened.

The securities lending industry has been hit hard over the past two years. Heavy losses in cash collateral, government intervention and declining spreads as well as lower volumes has caused the entire industry to re-examine their business models. Industry bodies such as ISLA have also been working hard to educate beneficial owners. It is therefore surprising that a pension fund would not be aware of the risks they are taking.

Many have been taking steps to understand the risks involved for some time. The London Pension Fund Authority (LPFA) originally ceased stock lending in 2008 after the collapse of Lehman Brothers, and after a thorough review, decided to re-enter the market in 2009. In an interview with Global Custodian just after the pension fund decided to start re-lending stock, Mike Taylor, CEO of the LPFA explained: We have reviewed our lending arrangements so no longer do we accept cash or equities as collateral, and this has been done in conjunction with J.P. Morgan, and we feel we are complying with the best practice as proposed by such organisations as the International Corporate Governance Network. We have a contract with J.P. Morgan that says what can and can’t be borrowed, and what collateral can’t be taken.

In his blog, Field also expressed shock that Pension funds were being paid for the risk of lending their assets but the returns were miniscule. Some figures cited to me was a return of 900 in every 1M pounds lent. The bank, I believe, was pocketing practically the whole of the fee it gained from lending out the pension fund shares.

McNulty does not see these returns as unusual. I don’t think that they are necessarily out of the question, those types of returns, he says. Securities lending returns tend to be measured in basis points, and gilt loans at eight or nine basis points are not unrealistic. We would stress always that the way people should look at this business is that it is very low risk and low return business.

At the time of the interview, the LPFA had assets of around 3.2 billion. However according to Taylor stock lending revenue was only in the hundreds of thousands.

McNulty also expressed surprise that the pension fund in question did not realise that its stocks were being lent out. I find it very difficult to believe that someone with some authority at the pension fund itself would not have been aware that lending was taking place, he said. Frank’s comments suggest that there is actual income being earned, and it is almost certainly the case that there would be some reporting to the pension fund management team. If any of the facts that Frank Field is stating are actually true, then it is a very extreme and rare situation we are dealing with. So rare, in fact, that McNulty could not remember a similar case over the past twenty years.

There is one factor that points in Field’s favour. Stock lending revenues for custodians are down significantly year-on-year. Quarterly results show State Street has suffered a decrease of 75% in securities lending revenues. BNY Mellon is down 85%. Northern Trust saw securities lending fees decline approximately 77%. But tough times for custodians does not mean that they are committing universal fraud. Frank mentioned some reference to Maxwell scandal. I think most people would regard Maxwell as being something quite different to securities lending. If any of it is true, I think it is unusual and very rare, concludes McNulty.

Frank Field’s blog can be found here

The Pensions Regulator’s statement can be found here

To listen to GC News Editor Giles Turner interview LPFA CEO Mike Taylor about its decision to begin lending stock again, please click here.