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San Francisco axes securities lending program

San Francisco City & County Employees' Retirement System has voted to end its securities lending program, confirmed board secretary Norm Nickens in an interview Friday.

Mr. Nickens said the program will wind down over the next few months following the board vote Wednesday.

The program is being discontinued concurrently as the pension switches custodians to BNY Mellon from Northern Trust, which had provided securities lending as part of its overall custodial services.

A memo from the system's investment staff presented to the board recommended terminating the program, saying on a yearly basis, “it is expected to generate very modest returns of slightly less than 3 basis points of plan assets.”

The memo also notes that the securities lending program led to large losses for the $21.6 billion pension fund during the financial crisis — $80 million in 2008, or 47 basis points of the system's then $17 billion in assets.

“We believe the retirement board, staff and our consultants need to focus our time and resources on the aspects of the portfolio with larger risks and expected returns than securities lending, whose risks can occasionally be surprising and whose expected returns are very low,” the memo says.

The memo says overall the pension fund has earned $118 million through securities lending since the program began in 1996, including $878,124 in the first eight months of the current fiscal year between July 1 and Feb. 28.

Investment staff recommends that security lending be re-evaluated if short-term interest rates rise to the level seen before the financial crisis — 3% to 5% interest for three-month U.S. Treasury bills. It says that interest income is a key component of the earnings from securities lending.