Bad News From the Gherkin???

Chris, The first thing you need to do is find out who is managing these funds. if you have a fund manager who spreads the risk i.e. invests in bonds as well as equities, invests in overseas companies you may be ok, not every country is facing a recession like the UK and the USA. Look at the property sector, the big house builders have lost so much of their share value, the likes of Taylor Wimpey have had to go to their shareholders to raise funds but for every sector that loses in a recession there is another that thrives in this environment. If it’s the Finance department that decides ask them who is managing the funds and then you can do some research.

The one thing that will happen is that there will be developers going out of business if things don’t pick up and the way things are going it is going to take us years to get back to the position we were in 7 or 8 months ago, and house prices will not get back to recent values for some years yet. This is why I ask, does Gordon Brown think he is Maggie Thatcher. Surely his economists must have told him what we are all thinking, Do we want hundreds of thousands of unsold units deteriorating, while developers are going out of business. People will not move while a recession is on and jobs are unsecure and even if they wanted to move, unless you have a huge deposit you have no chance of getting a mortgage.

It is very simple really, so why do our national and local governments not have the intelligence to comprehend what is happening?

admin flatters me!
To clarify the reported comments made at the recent RDC Extraordinary Council meeting, I regret there is no short or easy answer, and the financial pressures on many Councils will continue to range far beyond just increasing pensions liabilities, given the poor UK economic and fiscal outlook in the UK. I wish it were only the choice of pension fund manager or the Trustees’ investment policy guidelines to them that are problems, or when or whether to increase bonds and reduce equity weighting from 70%. It is a far more complex systemic problem, and even the choice of fund manager is not RDC’s but Essex.

The specific pension liabilities that I referred to were those relating to RDC staff, who are members of the Essex County Council run scheme, of which the RDC share of the deficit was £18.27m as at the latest 31st March 2008 valuation. Currently the standard corrective practise to address such shortfalls in funded public sector pension funds (and there are many others in similar or greater deficit to the Essex scheme) is to spread the annual top-up contributions (in this case by RDC for our proportionate share of the Essex fund liabilities) over 20 years. This compares with more conservative periods of only 10 years or less typically used in the private sector by the ever fewer defined benefit schemes (final salary based type) remaining since the Great Gordo’s annual £5+billion taxation pension raids began in 1997.

Even so, for the current year latest RDC top-up figure was set by the scheme actuaries at £680,000, a figure which I understand from officers will not be changed until another actuarial assessment is due in just under two more years. Thus during that time, although the actual top-up amounts budgeted from RDC may not change, the stock market, economic and demographic changes could meanwhile be storing up havoc, possibly leading to a massive increase in that figure when next reviewed. Not only could falling equities stock markets increase liabilities but, apparently paradoxically, the rising bond markets (= falling bond yields) in a recession will also dramatically worsen liabilities, through the anticipated returns on investment falling. Those relatively ‘risk free’ returns currently used in the actuarial calculations are based on yields for good quality AA rated corporate bonds. And, just when you least needed anything to exacerbate matters, along comes a proposed accounting change with the probability that those yields will be reduced even further in assumption for the calculations to use near totally ‘risk free’ long dated UK Gilt yields, typically around 1% lower still! I’m afraid I don’t have the specific information or actuarial knowledge to say by how much our RDC liabilities/contributions could rise, but it would likely be VERY significant, and may yet be topped up again by further increases in life expectancy on the anticipated period of pension payment to scheme members. Council Tax payers could be in the front line, as the Labour government is skint.

So how will the top-up bills be met, with the Central government grant fixed at plus 3.3% p.a. for 2007/8 to 2009/10 and any Council Tax rises capped at 5% p.a.? Many RDC residents are already struggling with the basic necessities of life (food, housing, energy, and transport costs, apart from Council Tax rises). Many Councils may need to ‘Think Micawber’, if possible further battening down the hatches on costs and even cutting services they currently provide if the developing ‘stagflationary’ recession deepens as much as I believe it will. How Gordon Brown must now wish he had blocked the already quadrupled cost (to £10bn and still rising) of the 2012 Olympics! (Hate to say it folks, but yes I warned on that too when RDC was consulted for its support!)

regards Colin ‘Jeremiah’ Seagers
(As a declaration of interest – please note that I am a Compliance Officer for an investment management firm specialising in fixed income investments for larger institutional clients such as insurance firms and pension funds.)