ITEM PF13
PENSION FUND COMMITTEE – 14 SEPTEMBER 2007
STOCK LENDING
Joint Report by the Head of Finance & Procurement and the Independent Finance Adviser
1. In November 2003 and in February 2004 the Committee received joint reports by the Head of Finance and the Independent Financial Adviser on stock lending. The reports recommended that ABN AMRO Mellon should be requested to undertake stock lending on behalf of the Pension Fund and the Committee agreed. Stock has been lent since April 2004 and provided a growing income to the fund.
2. Earlier this year it was announced that ABN AMRO Mellon and the Bank of New York would merge their custody business, which includes the stock lending function. Mellon is strong in lending equities, with their principle trading desk in Pittsburgh, while the Bank of New York is strong in lending bonds with their principle trading desk in New York. So it is claimed the merger provides a complementary fit needing little rationalisation. Both Mellon and the Bank of New York score highly in independent surveys of stock lending managers.
3. The proportion of lendable stock in the Pension Fund’s portfolio actually lent has risen since April 2004 and is now 10.0% (2006 7.9%). The present agreement with Mellon limits lending to 25% of the Pension Fund’s portfolio and the local authority regulations limit it to 35%. However, the net revenue earnt by the Pension Fund has risen much more sharply as the following figures show:
4. These amounts are now well ahead of Mellon’s original estimate of £43,500 once lending was fully operational. Further, Mellon has agreed that the share of lending revenue received by the Pension Fund will be increased from 60% to 70% from 1 September 2007, which will enhance the total revenue received. Revenue receipts tend to be heavily concentrated in the month of April and May, the principal equity dividend paying season, when there are opportunities in the German and French equity markets for overseas residents to take advantage of the varying tax status of different categories of holders.
5. The method of operating stock lending remains broadly the same as in 2003 and 2004. Mellon maintain a close control on the quality of collateral they will accept from counterparties (i.e. borrowers) and of the counterparties themselves. They have five different committees, which meet regularly to supervise this process.
RECOMMENDATION
6. The Committee is RECOMMENDED to note the contents of this paper.
SUE SCANE A F BUSHELL Head of Finance & Procurement Independent Financial Adviser
September 2007
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