As part of its campaign to promote good governance and administration of pension schemes, TPR is consulting on revised guidance for trustees on the requirement to have adequate internal controls. In this context, TPR has noted concerns expressed in relation to scheme assets from the practice of “securities lending” as it has been made aware of scheme assets being lent by fund managers on schemes’ behalf without full awareness on behalf of the trustees. In such situations, fund managers may retain the majority of the investment return despite the scheme retaining all the risk, and with inadequate collateral in place to cover this risk.
TPR therefore seeks to provide help for trustees in understanding the specific investment practice of “securities lending” and to manage the risks involved. To this end, TPR sets out the risks trustees need to identify and control and also the key issues for trustees to consider, including:
- Clarity about which scheme assets are to be lent, and on what terms.
- Having a good understanding about the proportion of scheme assets lent out under such an arrangement.
- Having an up-to-date knowledge of how much securities lending has taken place in respect of the scheme’s assets.
- Ensuring the fund manager has appropriate legal agreements in place making clear the borrower’s and lender’s obligations.
- Having appropriate controls and expertise to understand and monitor the risks.
View the full statement.