EUROPE - Barclay's attempts to manipulate the LIBOR rate between 2005 and 2009 could affect UK pension funds "negatively", depending on their derivatives trades, but it is still too early to assess the full impact of the scandal, a number of consultants have said.

Following Barclays recent admission that it deliberately attempted to fix the rates over a five-year period, many in the industry have speculated whether pension funds' returns were affected through commercial mortgages, swaps, short-term bonds and Barclays shares themselves.

But Boris Mikhailov, principal within Mercer's financial strategy group, told IPE it remained unclear what impact attempts to manipulate the bank-lending rate had had on the published LIBOR rate itself.

"We need to wait and see if the published LIBOR rate should have been lower or higher," he said.

According to Mikhailov, the real impact for pension funds will depend on their asset mix and derivatives positions at the time when the misconduct took place.

"Assuming that any manipulation did artificially lower LIBOR, then the implications for pension funds might be found on LIBOR obligations for the interest rate swaps or total return swaps they entered into," he said.

"In that case, a pension scheme could potentially be impacted in the sense that it would have paid less than it should have done. 

"However, there might have been a knock-on impact to the long positions under these derivatives. In other words, the fixed rate locked-in could have been lower too."

However, some pension funds using asset-swapped gilts might have been worse off as a result of the LIBOR rate being artificially lowered.

"Over the past three years, pension schemes have started using asset-swapped gilts to get LIBOR plus margin," Mikhailov said.

"Under that model, a pension fund would receive LIBOR plus margin and pay gilt returns back to a bank.

"As a result, if the LIBOR rate was lower than it should have been, pension funds potentially would have been impacted negatively as they would have received a lower LIBOR rate."

The National Association of Pension Funds (NAPF) followed a similar line of reasoning, in addition to questioning the remuneration of Barclays' executives.

The association also called on pension schemes to discuss the potential impact with asset managers managing holdings on their behalf.

David Paterson, head of corporate governance, said: "The impact of LIBOR manipulation on pension funds is hard to pin down and could have happened through a range of financial instruments.

"Pension fund trustees should ask their fund managers to tell them if and how their assets have been affected."
He said the issue had raised doubts about previous remuneration that needed to be answered, while pension funds should be "concerned" about whether the commitment to improved risk controls had any real meaning.

"Barclays should use its claw-back rules to penalise those involved by recovering bonuses and pay," he said. "Shareholders should also ask why the board was apparently unable to carry out its oversight duties effectively."

The London Authority Pension Fund Forum (LAPFF) also called for the claw-back of bonuses to 2005, when the interest rate manipulation first started, and urged the company to pursue criminal charges against staff and executives at the bank.

Chairman Ian Greenwood said: "The use of tactics to manipulate interest rates to create a favourable trading environment and pad the company's profits is inexcusable.

"This renews LAPFF's call for serious governance and cultural reform within the UK banking industry."

According to Fraser Smart, consultant at Bucks, the misconduct might push pension funds to take class action if any losses are involved.

"I expect there will be a number of pension schemes considering legal action to try to establish their losses and then mitigate them," he said.

"If this had happened in the US, I expect a class action would have been inevitable. 

"With other banks expected to be implicated in the weeks ahead, this issue could run on for years."