UK’S largest local authority pension fund, the £9bn Strathclyde Pension Fund, has admitted it has been caught out by the financial crisis that continues to envelope global financial markets.
The Strathclyde Pension Fund, which uses some of the world’s top investment management firms, also said that it had “suspended” the renting out of equities it owns to short-sellers and hedge funds on 22 September.
The Strathclyde pension fund had or has holdings in banks and financial institutions including HBOS, Lehman Brothers, Freddie Mac, Fannie Mae and insurer AIG.
All these organisations have seen their share prices collapse over the past 18 months. Shareholders in three of them — Lehman Brothers, Freddie Mac and Fannie Mae — saw their holdings wiped out after the bankruptcy or nationalisation of these institutions.
“We’re an equity investor and when equity markets become rocky we inevitably lose a lot of value,” head of pensions at Glasgow City Council, Richard McIndoe, told the Sunday Herald.
He said that plans by governments around the world for various forms of bank rescues and liquidity schemes would “help” some share prices to recover, but declined to comment on individual stocks.
On its website the Strathclyde Pension Fund says: “The current value of the fund will have fallen quite quickly. Clearly, with our global investment policy, the fund is affected by these events. We have been watching developments very closely and getting regular updates from our investment managers. We own shares in most big companies around the world, and that includes Lehman, HBOS, Freddie Mac, Fannie Mae, AIG and the other names which have been in the news.”
McIndoe said that in total the Strathclyde pension fund invests in 3,000 individual stocks and that no one individual stock accounts for more than 0.5% of the fund.
The Strathclyde pension fund has 180,000 members, and is available to employees and former employees of Strathclyde Regional Council and related local authorities and voluntary sector organisations, including Glasgow City Council. It takes payments from the members’ employers and invests the money in stocks, bonds and property with the aim of ensuring members get a guaranteed pension.
McIndoe insisted the dramatic falls in the value of bank and other financial shares “will have no impact whatsoever” on payouts to pensioners.
He added that the Strathclyde pension fund tends to pay out to pensioners out of its income — meaning the annual dividend and yield it earns from its investments — rather than out of capital growth.
The fund remains heavily exposed to equities in spite of the current market turmoil. However, McIndoe said this is partly due to a strategy of pursuing capital growth over yield. McIndoe said that the fund is currently split 75% equities, 15% bonds and fixed income, and 10% commercial property.
As with most large pension funds, the assets of the Strathclyde pension fund are invested through a number of external fund-management firms including Edinburgh-based Baillie Gifford & Co and Los Angeles-based Capital International (for global equities) and Henderson Global Investors, Western Asset Management and Legal & General (for bonds). The fund is in the process of putting the management of its £1.4 billion bonds portfolio out for tender, ahead of a review of its investment approach next year.
The Strathclyde pension fund also has £1.05bn in “currency overlay” and splits this between three specialist managers — Record Currency Management, Mellon and Millennium Asset Management.
McIndoe said the so-called “fundamental” currency management strategies adopted by Millennium had fared better than the “quant” strategies favoured by the other two managers since the crunch started in August 2007. However before that quant strategies performed better.
In recent months the Strathclyde pension fund will have racked up significant losses through exposure to Royal Bank of Scotland, which on Friday was buoyed by an announcement from the Bank of England that it would accept a broader range of collateral from banks that are suffering from a lack of cash in funding markets.
There was a rally in banking stocks on Friday as the Canary Wharf-based Financial Services Authority said it had raised the compensation limit for savings deposits, under the Financial Services Compensation Scheme, to £50,000 per customer.
Published in the Sunday Herald on 5 October 2008, two days before the technical collapse of RBS.