I chaired the Select Committee, which began the debate on pension reform after it was found out that Robert Maxwell had taken shares from Maxwell company pension funds. Our aim was to ensure that pension fund assets could not be put at risk again from such behaviour. A whole series of reforms would prevent an individual stealing pension assets á la Maxwell.
The image we held in our minds then was of individuals, or small groups of crooks, trying to get their hands on pension assets. We now need to add to this image, for it prevents us from focusing on the main threat. The information provided to me since introducing the short selling bill is that short selling is an industry-wide practice, which could prove to have a far more devastating effect on pension assets and pension security than Robert Maxwell.
The post-Maxwell reforms put in place a whole series of trip wires to prevent pension assets being lifted. I now discover that these safeguards do not operate in the way that I understood they would.
It would appear that all those pension funds that haven’t explicitly forbidden short selling are now exposed to this risk. Pooled funds are more vulnerable as it is less easy, perhaps impossible, to direct fund managers’ investment decisions.
Pension fund shares are being loaned out by banks to hedge funds whose primary aim is then to drive down the price of those shares, so that when the shares have to be redeemed, they are paid back to the pension fund at a lower value. The clear losers of this process are the members of the pension fund.
I would like to know what is the income the banks get for lending out pension assets about which trustees are unaware. One pension fund having assets lent unbeknown to itself was being paid less than £1,000 for each £1m of assets exposed to short selling. The lending is not confined to equities. How many banks, unbeknown to pension fund trustees, are lending out pension fund gilts to their own banks, who then put these gilts onto their own balance sheets?
Is this practice of borrowing gilts to stick back in bank accounts most actively pursued towards the end of the financial year? If it is, the bank’s balance sheet is artificially weighted to meeting the prudential terms the Financial Services Authority lays down for it. That practice is worrying enough, but the pension funds are given collateral that is by definition of less value, otherwise the swap would not have taken place.
I now see that the government’s taxpayer-financed rescue package for banks was not only important for the working of credit in our economy. It clearly protected many – maybe most – pension fund assets. Had banks crashed many pension funds would have been left with pretty dodgy assets in return for the gilts and other assets borrowed by banks.
The question for all pension fund trustees is who, today, is lending out your assets without your permission?
