Chris Hitchen’s calls to end the ban on short-selling have been criticised for potentially making schemes more volatile.
Speaking at the National Association of Pension Funds (NAPF) conference, Hitchen, the organisation’s chairman, said the financial services sector faced falling into “catastrophic conservatism” if tools such as stock lending and short-selling ended.
But Timothy Lyons, a partner at longevity bonds specialist Pensions First, said that although he recognised stock lending could add marginally to portfolio income, he was concerned that it could also significantly add to portfolio volatility.
“Since the introduction of FRS 17, pension scheme deficit volatility has become a major issue for companies that sponsor defined benefit pension schemes,” he said.
“While eliminating short-selling will not remove volatility in equity prices, it will certainly dampen it down.
How can it possibly be in the interests of trustees, their scheme members, or corporate sponsors to lend stock to speculators so that they can sell it in an attempt to drive the price down?”
Lyons’ comments came as commercial law firm Wedlake Bell warned that trustees who lent stock that was used for short-selling could be in breach of their scheme duties – possibly putting them at risk of claims from members.
The firm said that if pension schemes lose out on falling assets, members looking for scapegoats could claim that the trustees were in breach of their responsibility to manage the scheme in the best interests of its members.
Hitchen described short-selling as an important part of well-functioning stock markets and argued that its practice could stem volatility rather than cause it.
He also encouraged pension funds not to suspend stock lending, which has been seen by some commentators as encouraging reckless and selfish short-selling.
Hitchen pointed to research from Data Explorers that showed only 10% of HBOS stock was out on loan when HBOS’s share price crashed. Instead, he speculated that the HBOS rights issue earlier this year had flooded the market with too much stock and that it was the owners of this stock, rather than the borrowers, who had caused its panic selling.
Jane Wolstenholme, a partner at Wedlake Bell, added: “Trustees should take urgent steps to review stock lending practices. These arrangements often lack transparency and they can be structured in such a way that the benefits to the scheme are unclear.”
For more on the NAPF conference, see page 10. Enhanced podcasts from the event are available at www.pensions-management.com.
