SACRAMENTO, Calif. - The board of trustees for the $80 billion California Public Employees' Retirement System has called for changes in its securities lending program after hearing part of the program has become more risky and the overall program has too little oversight.
The board decided to drop two of its four securities lending agents. The cut will tighten the board's control over the securities lending process. Also, the staff and the fund's consultant, Wilshire Associates, Santa Monica, Calif., believed only two agents were needed.
One agent will lend international securities and the other will lend U.S. government securities. The four agents are Bankers Trust Co., New York; State Street Bank & Trust Co., Boston; Mellon Bank, Pittsburgh; and Metropolitan West Securities Inc., Los Angeles. The board didn't say which two agents would be dropped.
The fund's staff also will tighten the fund's securities lending guidelines and set up an independent review process.
The decision to tighten the fund's securities lending program came after the pension fund received a review of its program from Wilshire.
In the last three calendar years, the pension fund has made $59 million from securities lending. But, the consultant said, changes in the securities lending markets in recent years make it more risky.
A key reason for the increase in risk, the fund's staff said, is that lending agents in general have stretched fund guidelines to increase return on cash collateral.
The collateral is given to the fund from the borrowers of its securities. The fund's lending agents invest the collateral in short-term securities.
In its study, Wilshire recommended the retirement system continue to lend its U.S. government, international equity and international bond securities. Wilshire found the system derived 84% of its securities lending income from U.S. government and international equity securities.
But Wilshire recommended the fund perform a cost-benefit analysis to determine if its income from lending U.S. equities and corporate bonds is greater than the costs associated with lending those securities.
A reason for considering whether to continue to lend corporate bonds, said Wilshire consultants, is that only about $750,000 was generated from lending corporate bonds during the three-year period while $59 million came lending other securities.
In recommending increased oversight, Wilshire said the fund has less oversight of the lending program than it does of other externally managed portfolios. But, Wilshire said, the portfolio of collateral obtained from lending securities is about $6 billion.
Wilshire also found that while the lending agents use the fund's investment guidelines for collateral investments "these guidelines have been altered over time by the lenders." It also found the guidelines are significantly different among the lending agents.
Wilshire recommended, and the board requested, changes to standardize guidelines among agents. Wilshire also said current guidelines permit too much flexibility with respect to duration risk, sector/issue selection and the use of derivatives.
TACOMA, Wash. - The $350 million Tacoma Employees' Retirement System again selected The Northern Trust Co. as its custodian after putting the job out to bid for the first time since 1986.
Most major custodians were considered in the bidding process handled by the fund's consultant, Wilshire Associates, Santa Monica, Calif. The list of candidates included Bank of New York, Boatmen's Trust Co., Boston Safe Deposit and Trust Co., Chase Manhattan Bank, Citibank, Harris Trust and Savings Bank, Mellon Trust and State Street Bank & Trust Co.
The finalists were Boston Safe Deposit, Chase, State Street and Northern.
Patricia Pabst, retirement system director for the Tacoma fund, said trustees picked Northern for many different reasons. One consideration was that Northern Trust is keeping up with the top custodial banks in emphasizing global custody operations.
Without an emphasis on putting money in global custody, international trades can be slowed or fail, she said. She also said Northern has "very good reports."
Yet, most of the very top custody banks are strong in both those areas. Pension consultants generally say any finalist in a custody race probably will be a good choice.
Other considerations for choosing Northern, said Ms. Pabst, were that Northern's custodial fees are "reasonable," it has a "great staff," and it has a good securities lending program.
She said the securities lending program is "one of the best" and the bank has a "high ratio" on the amount of money returned to the pension fund. Pension funds and securities lending agents generally split lending fees.
