UK - Volatility in the investment markets has increased pension deficits relating to the Worcestershire County Council Pension Fund over the last year.

The Worcestershire County Council Pension Fund, maintained by Worcestershire on behalf of its own council and over 60 other local authority bodies, saw the value of its fund drop to £1.19bn (€1.5bn) at March 31 2008 from £1.25bn in 2007.

Figures from the pension fund's annual accounts show despite this loss, income from investments rose slightly to £29.3m from £26.6m, with equities producing the most income with a return of £23.3m, compared with £19.8m the previous year.

The last actuarial valuation conducted in March 2007 revealed the pension fund had a funding level of just 72%, albeit an improvement on the 67% funding level in 2004, however recent volatility in the market has resulted in increased deficits for individual employers including Herefordshire and Worcestershire Councils.

Herefordshire Council's annual report revealed its share of assets in the Worcestershire County Council Pension Fund is £190.6m, however its liabilities are estimated at £323.5m resulting in a deficit of £132.9m.

This is significantly higher than the £88.8m deficit reported in March 2007 and figures suggest poor investment returns were the main driver behind the deficit increase, even though the value of the assets have fallen slightly from the 2007 estimate of £205.1m and assets have increased from £293.9m.

Herefordshire's accounts showed although employer contributions increased to almost £10m during the year, the council's share of past service costs more than tripled to £2.3m, while the difference between the actual and expected return on assets was -£25.4m, or 13.3%.

The report to Herefordshire's audit and corporate governance committee noted while the deficit "does not have to be met immediately from the council's reserves, action must be taken over a period of years to eliminate it".

However, the recommendation from the council's actuary to increase employer contributions from 18.2% of pensionable pay in 2007/08 to 20.4% by 2010/11 was met with concern by at least one of the committee members, Councillor Mills, who expressed worries about the impact of the loss on assets on council commitments to the fund and urged more control over increases in contributions.

The deficit for Worcestershire County Council's share of the pension fund meanwhile rose from £152m in 2007 to £258m at the end of March 2008, as the value of its assets dropped from £437m to £417m, and liabilities increased from £589m to £674m.

Figures showed the largest contributing factor was a gap between the expected and actual return on assets of £54m, or 13%, although changes in demographic and financial assumptions also increased liabilities by £33m, or 5%.

Although the annual report noted the deficit had a "substantial impact" on the council's net worth, it revealed pension contributions would only rise from 16.6% in 2007/08 to 17.2% in 2008/09, with any future increases not expected until after the next valuation in March 2010.

The £1.2bn pension fund currently employs five specialist external managers in a mix of active and passive equities, although in the year to March 31 2008 the fund reduced its allocation to an active portfolio run by UBS Asset Management from 11% to 2% and increased its investment in a UBS passive portfolio from 29% to 38%.

Other external managers include JP Morgan Asset Management, which runs 10% of the fund, while Capital International manages around 8% of the schemes assets, 16% is allocated to Nomura Asset Management UK and 26% of assets is run by SG Asset Management.

Overall, the scheme's asset allocation is currently 7% in fixed interest securities, 58% in equities - of which 22% are UK and 36% are overseas - while 31% of the assets are in pooled vehicles and the remaining 3% is invested in cash.

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