Slightly more pension funds surveyed by Finadium pulled out of securities lending last year compared with 2008, based on the amount of assets.
Of those pension funds that were lending in 2007, 79.8% were still doing so at the end of 2009, while 10.7% stopped in 2009 and 9.5% stopped in 2008, as measured by the amount of their total pension assets.
The findings are based on interviews in November and December with officials at 20 public pension funds and five corporate pension funds, with combined assets of $759 billion, interviews in November and December 2008 with 34 pension funds holding $747 billion in combined assets, and 40 pension funds with a combined $1.3 trillion in assets in October and November 2007.
The percentage of pension funds using a non-custodial or third-party agent lender fell to 33% in 2010 from 40% in 2009, based on the interviews. In 2008, the figure was 31%.
“The percentage of funds that expect to unbundle securities lending from custody in their next RFP” fell to 29% for 2010, down 32% for 2009 from 41% for 2008, according to the interviews.
“The funds that were planning to unbundle had some of the biggest assets under management and strongest securities lending staffs, but there were plenty of large plans that planned to bundle their RFP as well,” the report said. “For third-party agent lenders, 2010 will be a hard year to capture new business from institutional investors.”
Also, pension funds “are wondering whether current revenue-split practices in securities lending should be replaced by an asset-under-management fee,” the report said. “The main driver for an asset-under-management fee for securities lending agents is rebalancing incentives for participants in a lending program.”
Among other findings, 42% of the pension funds interviewed in 2009 benchmarked their securities lending returns, using “a benchmarking service provided either by their lending agent, a private collection of institutions or a third-party provider,” the report said.
“Users of benchmarking services had mixed satisfaction levels,” the report said. Among responses, some “noted that benchmarking reports were a work in process and needed to show risk-adjusted returns in order to be truly relevant.”
The report also includes data from a survey of 92 public pension funds, whose combined assets total $2 trillion. About half of the funds interviewed were among the 92 surveyed.
Josh Galper, managing principal of Finadium, who runs its research and consulting advisory practice, authored the 34-page report, which covers best practices in securities lending, trends in collateral management and attitudes toward custody services.