SIC ditches city investment team as pension fund takes £25m hit
By NEIL RIDDELL
THE VALUE of the council workers’ pension fund has taken a hammering as a result of the global financial crisis in recent months, shedding £25m in value over the past six months.
At the end of September the fund stood at £183m, down from £208m at the beginning of the current financial year, a figure which is likely to have fallen further during a prolonged period of market turmoil in the subsequent three weeks.
SIC head of finance Graham Johnston’s message at a meeting of the pension fund management consultative committee in Lerwick Town Hall on Monday was that, although the losses were “undoubtedly regrettable”, investing heavily in equities was a strategy which had served the council well in the past two decades and that changing course would be unwise at present.
The pension fund showed an almost tenfold increase in value between 1990, when it stood at £25m, and last year when it peaked at around £225m. With the stock market at a low ebb, Mr Johnston agreed with committee member Bill Manson that it would be “a mistake at this time to pull out of equities and go into safer areas”.
While the latest news “tells a tale of a difficult time in the markets”, he told committee members that it was not all doom and gloom. Contributions to the fund continue to exceed drawings from now-retired members, meaning there is no need for the SIC to liquidate any of its investments. Net contributions were £6.5m this year, up from £5.4m last year and Mr Johnston said it was “a long way” from being a mature fund, though the ageing population demographic will pose a major headache for future generations.
Members of the council’s pension scheme pay a six per cent employee contribution, while the SIC contributes 14.4 per cent. Mr Johnston said that although this was a high rate of employer contribution, it was more stable than many other local authorities’ and is now one of the lower contributions among councils across Scotland.
Councillors agreed in a private meeting yesterday to end Capital International’s mandate as fund managers and transfer the bulk of the fund to Barclay Global Investors, a move which is estimated to cost an initial £140,000. Mr Johnston said this made long-term financial sense as the fees charged by Barclay’s, which will use a market tracking system to keep up with market trends, will be considerably lower and the new managers “should immediately offer better performance”.
The pension fund has been invested by Capital International for the last six years but after a good initial record, the managers’ performance has deteriorated sharply in what Mr Johnston described as “a persistent pattern of underperformance”. The move away from Capital International follows a similar move by Shetland Charitable Trust earlier this year.
More than eight-tenths of the pension fund has been invested in equities and bonds by Capital International and, through its custodian, the council has had transactions with the recently-collapsed American investment bank Lehman Brothers, but securities attached to the transactions meant no loss was incurred by the SIC.
The council also has deposits with the Halifax Bank of Scotland (HBOS), but initial concern over the future of the bank has now abated in light of the proposed takeover by Lloyds TSB and the part nationalisation of major banks in the UK. Mr Johnston said it was reassuring that there is now “something approaching unanimity” among western economies that major banks will not be allowed to fail.
He said HBOS continues to offer “very good interest rates” of between 4.5 per cent and 6.63 per cent for the pension fund and that the use of other banks which meet the council’s criteria may be considered, but only once the financial markets have stabilised.