For the better part of 30 years, giant investors have relied on securities lending to provide some additional income and a slight sprucing up of returns. But in an uncertain economic environment, pension plans are increasingly worried about one particular aspect of this time-honored practice: collateral risk.
According to this month’s Pensionforum, 44.1 percent of respondents have at least some concerns about their securities lending programs. Of that group, 59.3 percent cite collateral risk as one of the dangers that worry them most. That is, they fret about the way in which a broker handles the borrower’s cash deposit, required to rent out the securities. Often brokers and banks who serve as intermediaries will invest this cash collateral in a myriad of short-term notes, and it is this practice that makes some lenders skittish.
Still, a substantial 65.3 percent of respondents have securities lending programs in place. The majority of the group -- 91 percent -- let their custodians handle these programs. More than 22 percent of the plans that utilize securities lending collected between $1 million and $5 million from it last year, with just 7.5 percent earning more than $5 million.
Nearly 56 percent of respondents to this month’s Pensionforum say they don’t have any concerns about securities lending risk, and just 2.9 percent say they are very concerned. Still, for those who are at least a bit nervous about the process, collateral risk isn’t the only source of concern. Counterparty risk and the inability to access securities immediately in a crisis also worry lenders.
Almost one third of those surveyed indicate that they are reviewing their securities lending programs; 26.9 percent say they are monitoring programs more closely than they did just two years ago.
Do you have a securities lending program?
Yes 65.3%
No 34.7
If so, what percentage of your total assets do you lend?
Less than 5 percent 16.9%
5 to 9 percent 3.4
10 to 14 percent 15.3
15 to 19 percent 11.9
20 to 25 percent 11.9
More than 25 percent 40.7
Who manages your securities lending program?
Our custodian bank 91.0%
A brokerage or investment banking firm 6.0
An independent securities lending firm 1.5
An in-house lending desk 0.0
Other 1.5
What portion of the fee do you keep?
Less than 50 percent 9.2%
50 to 59 percent 21.5
60 to 70 percent 53.8
71 percent or more 15.4
Is income from securities lending a factor when you choose a custodian bank?
Yes, a major factor 6.7%
Yes, a minor factor 34.7
No 58.7
What was your income last year from securities lending?
Less than $100,000 22.4%
$100,000 to $199,999 17.9%
$200,000 to $499,999 19.4
$500,000 to $999,999 10.4
$1 million to $5 million 22.4
More than $5 million 7.5
How does this income compare with that of the previous year?
Higher 40.4%
Lower 59.6
If your income was higher, how much did it increase?
Less than 5 percent 33.3%
5 to 9 percent 37.5
10 to 19 percent 20.8
20 to 40 percent 8.3
How much did your income from securities lending add to your investment performance last year?
Less than 25 basis points 98.4%
25 to 50 basis points 1.6
Are you concerned about potential risks in your lending program?
Yes, very concerned 2.9%
Yes, somewhat concerned 41.2
No, not concerned 55.9
What kinds of risks worry you most? (Choose all that apply.)
Counterparty risk management 49.2%
Collateral risk 59.3
The risk that we can’t sell securities when we want to 33.9
Other 8.5
Are you reviewing your lending program?
Yes 32.9%
No 67.1
How closely do you monitor the way in which your collateral is invested?
Very closely 9.0%
Fairly closely 35.8
Not very closely 38.8
We don’t monitor 16.4
Do you monitor more carefully than you did two years ago?
Yes 26.9%
No 55.2
Can’t say 17.9
If you don’t engage in securities lending, do you think you will in the near future?
Yes 11.1%
No 37.0
Can’t say 51.9
If you don’t engage in securities lending, what is the main reason?
Profits don’t justify the risks 56.0%
Don’t like the common collateralization and accounting 4.0
Other 40.0
The results of Pensionforum are based on quarterly surveys of a universe of 800 corporate and 250 public pension plan sponsors. Because of rounding, responses may not total 100 percent.
