Caprio: RI Averts National Securities Lending Crisis

As many as 90% of U.S. pension funds could suffer losses

PROVIDENCE, R.I., Nov. 3 /PRNewswire-USNewswire/ -- In the wake of the announcement from California's state pension fund (CALpers) that it recently lost approximately $700 million in its securities lending program, General Treasurer Frank Caprio confirmed today that the Rhode Island State Pension System exited its securities lending program earlier this year after realizing a profit of $10 million.

In a securities lending program, the sponsor of a plan has a pool of stocks and bonds (securities) that they do not plan on selling. The plan can earn extra income by loaning these securities out to other firms which enables those firms to engage in various equity strategies.

"In the volatile markets we've seen over the past year, my team has made it a priority to focus on existing investments that may carry unintended risk and exit those investments," said Treasurer Caprio.

Shortly after Rhode Island exited from securities lending, the national periodical Pension & Investments reported as follows:

As many as 90% of U.S. pension funds and many defined contribution plans have been badly sideswiped by valuation problems in the enhanced cash collateral pools that back securities lending activities.

Pension & Investments also quoted Cynthia Steer, managing director and chief strategist of consultant Rogerscasey Inc., Darien, Conn. as saying "Only a few institutional investors - less than 10% - got out of this alive because they got out early or were very conservative in their fixed-income investment management. They are the exception, not the norm."

The announcement by the California pension plan is likely to be the first in a string of announcements relating to losses stemming from securities lending programs. Florida recently announced $560 million in unrealized investment losses from its securities lending program. Most large state pension programs currently have securities lending programs.

When the securities are out on loan, the plan receives a pool of collateral, usually equal to 103% of the value of the securities. The pool of collateral is where the securities lending risk can reside.

"Early in my administration, we moved the collateral in our securities lending pool into much more secure investments," said Caprio.

"The investments we made held a higher percentage of liquid government notes including Treasuries, which not only offered more safety but also provided better returns when the flight to quality occurred in late 2008," Caprio continued.

By the end of 2008 it became apparent that even the move to a high quality collateral pool was not enough to ensure a favorable risk/reward scenario. "In the fourth quarter of 2008, we initiated a recommendation to exit the program altogether and in the first quarter of 2009 the program was terminated," said Caprio.

In the October issue of Plan Sponsor, a monthly magazine focused on pension plan design and investing, the lead article highlights how securities lending has become the focus of litigation between plaintiffs' attorneys and plan sponsors and trustees.

"I commend our State Investment Commission and investment staff for acting promptly and executing the recommendation to exit the state's securities lending program," said Caprio. "We will continue to focus our efforts on eliminating unintended risk from the state's portfolio."