Credit Crisis Brings Pension Fund Attention to Liquidity

The survey of 141 large corporate pension funds, public pension funds, endowments and foundations indicates some institutions had become lax in their oversight of investment practices within securities lending pools and short-term investment funds prior to the start of the global credit crisis in 2007. Additionally, some master trusts and custodian banks were not being proactive in terms of communicating information about portfolio composition and performance to clients.

According to a Greenwich Associates press release, more than 47% of the institutions surveyed say they experienced unanticipated risk or credit exposure in their securities lending collateral pools over the past year. The proportion increases to more than half among those with more than $5 billion in assets.

More than 20% of respondents overall say they experienced an unanticipated lack of liquidity in their securities lending collateral pools in the last year. More than a quarter of public pension funds report an unexpected interruption in liquidity, as did almost the same proportion of the country’s largest corporate pension funds, the press release said.

Nearly one third of institutions experienced unexpected risk or credit exposure in short-term investment funds over the past 12 months. More than 40% of corporate funds with more than $5 billion in assets say they experienced unanticipated risks or exposures, as did nearly the same share of endowments and foundations with more than $1 billion in assets.

As a result of the credit crisis catching them by surprise on the liquidity front, Greenwich Associates found more than 45% of institutions say they are currently reviewing internal policies related to their securities lending programs or short-term investment programs. They are considering or implementing the following changes:

• Evaluating the costs and benefits of their securities lending programs, and discontinuing or modifying them if the risks seem to outweigh return potential;
• Stepping up their oversight of fund investment practices, increasing the frequency of communications with managers, and more carefully reviewing regular statements; and
• Tightening investment guidelines by restricting investment in SIVs, CDOs and other structured or securitized product or limiting investment to government securities.

In addition, while more than 70% of institutions say they were satisfied with their master trust or custodian banks' responses to unanticipated risks or interruptions in liquidity, over a quarter said they were not, citing overall lack of support and communication.

More than 80% of institutions that experienced unexpected risks or credit exposures in their short-term investment funds say they were satisfied with the response of their master trust or custodian bank; however, 17% say they were not - a share that jumps to 35% among institutions with more than $5 billion in assets. Specifically, dissatisfied institutions say actions or inaction on the part of their master trust or custodian bank forced them to realize losses.