Swiss pension funds have largely abandoned the securities lending market due to «unattractive» risk/reward ratios since the onset of the financial crisis and the misalignment of interests between lenders and borrowers.

Speaking with IPE, Jean-Pierre Steiner, director of the Caisse de prévoyance du personnel des établissements publics médicaux du canton de Genève (CEH), listed several reasons why his scheme – which will merge with the Caisse de prévoyance de Genève (CIA) in January 2014 – decided to drop its securities-lending programme.

He said the market currently suffered from a «misalignment of interests» between pension funds, which have longer-term investment views, and borrowers such as hedge funds, which largely base their strategies on short-selling. «The use of securities lending would lead us to create risk-management solutions that come in direct opposition to what our scheme really wants to achieve,» he said.  

Steiner also pointed to conflicting interests between pension funds and security lending agents, which «participate in the earnings but not the losses» and often push schemes to take more risks than they wish. He also pointed out that the securities lending market currently offered no voting rights to lenders. «This is one of the main issues at the moment,» he said. «Pension schemes have no voting rights in the securities lending market, which goes against the new Swiss regulation on excessive corporate remuneration that came into force in March and obliges schemes to exercise their voting rights.»