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UK’s FSA pension scheme shifts to bonds

UK – The Financial Services Authority, the UK’s main financial regulator, says its own pension scheme is in “serious” deficit – prompting a move away from equities to bonds.

The FSA’s annual report released today revealed a deficit of 80.6 million pounds (120 million euros) under FRS17.

It said: “Although this deficit is a serious matter, as it substantially exceeds our reserves, we do not believe that it impairs our ability to operate as a going concern.”

“The main reasons for this are that the pensions liabilities do not crystallise for many years, and that we have statutory powers to raise fees to allow us to meet our obligations.”

The FSA said that the scheme’s investment strategy – with an equities allocation of 80% - was reviewed during the year, “given that the scheme is closed to new members and is gradually becoming more mature”.

“Following the review, the trustees are likely to move gradually to lower risk assets in the medium term,” the report said. A spokesman said this referred to bonds.

“While this decision lowers the volatility of the expected return on the scheme’s assets, it also lowers their expected return to around 6.0% (0.5% higher than the FRS17 corporate bond discount rate)," the report said.

“The change in the assumption regarding the long-term rate of return on pension fund assets caused the pension fund liability calculated on this basis to increase by approximately 10 million pounds.”

It said the large deficit was “particularly significant” for the FSA because it deliberately operates with a low level of reserves in the light of its powers to raise fees.

The FSA aims to contribute five million pounds to cut the pension deficit in 2004/5. It said: “We believe that it is likely to be necessary to make deficit reduction contributions at about this level for a number of years, in order to ensure that the scheme is able to meet its obligations.”

The scheme’s assets are approximately 50-50 managed by Barclays Global Investors and Merrill Lynch, the spokesman said. There are no advisors.

The FSA’s final salary scheme was closed to new members since June 1998. As at the end of March this year, 880 staff were in the scheme, with 1,410 in its money purchase scheme.

FSA chief executive John Tiner is not a member of the FSA scheme – instead he received a 47,741-pound supplement to his supplement his own personal pension.

According to the report, pension liabilities rose to 237.1 million pounds as at the end of March, from 220.6 million pounds a year earlier. Assets grew to 156.5 million pounds from 118.4 million pounds.

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