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'Northern Rock' cost public pensions £300m - Hermes

UK- Members of Parliament (MPs) have been told  by pensions experts UK local government pension funds may have lost in the region of £300m (€450m) in value through the Northern Rock banking crisis.

Speaking at a meeting in London this morning, David Pitt-Watson, chairman of Hermes Equity Ownership Services - a division BT pension fund's investment house Hermes - told MPs of the Treasury Select Committee public sector pension funds are thought to have lost between £250m-£300m since the Northern Rock liquidity crisis began in September.

More specifically, he stressed it was hard to be certain of the exact figure as it was unclear where hedge funds - which pension funds have invested in - were holding assets, although the understanding is it may have cost several hundred millions of pounds.

"Clearly the pension funds that owned Northern Rock [shares] have been affected. Public sector pension funds have lost around £250m-£300m since the Northern Rock situation began," said Pitt-Watson.

He suggested the overall figure could be higher as pension funds with hedge fund investments were unable to ascertain where there assets are held.

"I checked with Hermes, and people have told me there not completely sure how, for BT, the 20 hedge funds invested in have done. We know one was betting against sub-prime because they came back and told us they have made good returns. But the man in the street is very firmly affected by this. Sophisticated investors know what they were doing, and tried to beat the market. But they didn't behave like owners, as banks did in the past."

He continued: "I'm sure people's pensions will be okay in 25 years' at the end of the day, but we don't know. We don't know what exactly what those hedge funds have invested in, but a lot have said they have shorted. It is railway workers and telecoms pensions who invest, but the investment is often several levels back from pension funds, and the concern is there is no-one there checking these companies are as secure as they say they are," added Pitt-Watson.

The earlier meeting to discuss financial stability and transparency - in light of the run on Northern Bank assets a few months ago - comprised of officials from several key bodies in the UK pensions arena, including Chris Hitchen, chairman of the National Association of Pension Funds (NAPF), alongside representatives of the Investment Management Association and Association of British Insurers.

While all parties acknowledged pension funds were unlikely to be invested in the mortgage-backed securities which sparked the summer liquidity crisis - Hitchens also predicted pension funds could find it increasingly difficult to diversify into private equity for the income exposure, as a result of the reduced loan capacity created by the credit crunch.

"Pension funds are trying to diversify in as many ways as possible. There is a large, but not significant, exposure to private equity. However, I think it might be hard to gain that exposure because not as many deals are likely to available in the future," said Hitchens.

Both parties agreed with MPs' suggestion credit ratings agencies could be seen to be suffering a conflict of interest by receiving funding from the banks they rate, noting the mandates pension funds create are often dependent on the credit ratings system to establish and limit potential fixed income investment criteria.

"There is an inherent conflict of interest," said Hitchens. "We don't believe at this stage it needs to be addressed by formal regulation. We would prefer it to be done by a formal code of practice."

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