There I was, keyboard and mouse at the ready, a hot mug of coffee carefully placed in the thoughtfully supplied… … cup holder on my Dell. I was ready to write about the worsening news in the commercial property sector when, out of the corner of my eye, I spotted a little snippet flash by on my news feed. At first I looked, shrugged and turned back to the hazardous task of typing and drinking hot coffee. Then I looked again.

It appears that UK pension funds have gone into deficit in November, to the tune of £5bn, so says the Pension Protection Fund (PPF). Apparently the decline in defined benefit schemes was due to a fall in gilt yields and equity markets during the month. The fall was an acceleration too, from the point of view of schemes already in deficit, going from $48bn in October to £73bn. Schemes in surplus got whacked, with their surpluses dropping from £101bn to £68bn over the same period.

That's some drop in a month, a simple calculation says that overall £58bn in value disappeared from defined benefit schemes. After a quick look at the FTSE, I note a fall in mid November that was retraced by the end of the month, not dissimilar to other market action this summer. Gilts rose too but not to the extent you would worry about. So what happened to cause such losses?

Maybe this is a clue. In June the Funds did well, hitting a surplus of £99bn and even with all the credit crunch fallout, still remained in good shape into October with a surplus of £53bn. That's worth a second look. The surplus dropped £46bn over the summer and then the pace of depreciation increased, by a factor of 5, into November. All of a sudden the use of the word healthy, as seen on the wire, seemed somewhat optimistic. In classical terms this is the action one would see at a top.

Now, I am no expert with pensions, in fact I have not looked deeply at the sector since the 00-02 fall in the markets but after I had done the mental calculation, I was glad I had taken long enough so the coffee had cooled, therefore not burning my neck when I missed my mouth. Years of building surpluses had been wiped out in 6 months.

Remembering the 00-02 “experience” I wondered how pension funds, after all the bloodletting and re-regulation, could get themselves into a worsening situation again. The how stood out like a sore thumb: “a fall in both gilt yields and equity markets during November” said the PPF. That explains it.

Pension Funds are not, in the main, positioned for anything other than upside economic conditions and with the outlook uncertain this is not a good stance to be in. It would appear that the increased volatility has not helped either. How this plays out is now reliant on the speed of any slowdown and the nimbleness of the Funds. Although gilts were mentioned on the wires, the chase for yield over the past few years didn't bypass pension funds. Is it possible that highly rated assets bought a few years ago have suffered depreciation, increasing asset losses overall?

Approaching 5 years on from the last pension funds debacle are we are close to repeating the experience? Its certainly not a given that it will happen, hopefully safeguards have been strengthened since the beginning of the decade. I do know however that I shall be paying more attention to what the PPF have to say over the next year that I have done to date.

Market Snippets

The day before the US Federal Reserve (FOMC) announce the rate decision which is widely expected to be a 0.25% cut with a possible 0.5% cut in the discount rate, the Fed drained liquidity from the markets. By deciding not to roll its T-Bills due on Thursday, the Fed will remove $5bn from the markets.

Also in the US, MBIA announced it had found additional capital in the form of a cash infusion from Warburg Pincus. WP will make an initial investment of $500m, taking 16.1 million shares of MBIA. WP will also support a shareholders rights offering for the same amount in exchange for warrants for up to another 16.1 million shares.

Bank of America has started to close off an enhanced money fund to new investors as losses mounted, reducing the fund from $40bn to about $12bn in only 2 months. The Columbia Strategic Cash Portfolio was only open to investors with a minimum of $25m. Losses in the fund, set up like a money market fund but without the guarantee of the $1 per share NAV, mounted as huge losses in asset backed securities increased.

Finally, back in the UK, figures released show that the commercial property sector is in a downturn. Jones Lang LaSalle, a real estate consultancy, is predicting a 24% fall in total investment, dropping to £48bn in 2007. They consider London offices and shopping centres to be hit the hardest.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.