Strathclyde’s pension fund in the red

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By Ian Fraser

Published: The Sunday Times

Date: 5 April 2009

Exposure to toxic banks has given Strathclyde a huge deficit

Strathclyde pension fund’s deficit has grown to about £2.3 billion due to changes in demographic assumptions and a drop in the value of its investment portfolio.

The fund, Scotland’s largest, and administered by Glasgow city council, revealed it had current liabilities of more than £10 billion but, according to a snapshot valuation in January, its assets are worth less than £7.7 billion. In 2005, the fund had a deficit of £230m.

Richard McIndoe, head of pensions at the council, said that 2008 “certainly wasn’t a fun year for us”. The fund has lost an estimated £50m through its exposure to the Royal Bank of Scotland, and has confirmed that it is considering joining a US-based class action against the bank. Shareholdings in other collapsed financial institutions such as HBOS, Lehman Brothers, Freddie Mac, Fannie Mae and AIG, have also suffered.

McIndoe said: “Our main route out of it will be equity market recovery. We’re not really taking any other specific measures. We’re a long-term investor, all our strategies are very long term.

“It was a very poor year for equities but we’ve seen very poor years for equities before and we ride them out and assume markets will recover. It might look a lumpy old model just relying on equity returns but equities have delivered over very long periods. You have to be patient and you have to be pretty brave sometimes, but they do come back. And I guess that remains our core belief right now, that equity markets will recover.”

Key equity fund managers used by the fund include Legal & General, Baillie Gifford, Capital International, AllianceBernstein, Invesco, Edinburgh Partners, Lazard, Gartmore, JP Morgan, and Genesis.

McIndoe said the Bank of England’s policy of quantitative easing (QE) has exacerbated the situation. “The fact we use the gilt yield as a discount rate has increased our liabilities and QE has accelerated that.”

The fund has 180,000 members and is available to employees and former employees of Strathclyde regional council and related local authorities. In a report, it said that its investments returned -4.4% against a benchmark of -4.9% in the fourth quarter of 2008.

BT explores way to bridge pension deficit

BT is considering injecting its property assets, including the landmark BT Tower and its headquarters close to St Paul’s Cathedral, into its pension fund as it tackles its deficit. The company owns 10 buildings which could be worth £300m in total. It is expected to get a third-party valuation before deciding whether to proceed with the move. BT is exploring ways to bridge a pension deficit expected to be in excess of £5 billion after its latest valuation.

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