Analysis: Frozen Russian assets add to war woes for UK pension funds

LONDON, March 28 (Reuters) – British pension fund managers are canceling billions of pounds of frozen Russian assets held for their members as they run out of options to sell them safely, adding at risk to their funding positions from Russia’s invasion of Ukraine.

The funds have in many cases written down the value of these assets, after last month’s invasion – which Russia calls a “special military operation” – led to rounds of sanctions by Western governments and countermeasures by Russia.

There are approximately two trillion pounds ($2.64 trillion) of assets in defined benefit pension or final salary funds, which provide guaranteed retirement income to millions of workers, including including garbage collectors, supermarket staff and bank tellers.

Pension trade bodies and major pension funds contacted by Reuters said Russian investments were likely to account for up to 0.5% of pension assets in Britain, or 10 billion pounds.

Many pension funds are in deficit after years of extremely low interest rates that have dampened their investment gains. But their funding levels have improved during the COVID-19 pandemic as economic stimulus in response to the virus has pushed up asset prices.

Now the invasion is causing shocks.

“As soon as the conflict happened, in fact, most investment managers wrote that investment (in Russia) was at zero,” David Fairs, executive director of regulatory policy at Reuters, told Reuters. The Pensions Regulator (TPR).

“The biggest impact is what happens to inflation, what happens to markets, what happens in terms of energy prices, what happens to supply chains,” he said. he adds.

Besides the hit to pension fund investments, the economic repercussions of the war could affect the financial strength of companies that support pension schemes, he said.

A poll of 2,000 UK adults by campaign group Make My Money Matter this month found that 86% of people wanted their pensions to move out of Russia.

But with tit-for-tat restrictions rumbling the trading and payment systems, it’s not easy to sell.

“You can make the decision in principle (to sell), but in fact you probably can’t negotiate right now,” Fairs said.

Even if you can find a buyer, rigorous due diligence is needed to verify who you are selling to.

“If it’s a bargain price, it’s probably an oligarch trying to buy it,” a source at a major pension fund said.

“It could be as bad to sell it for 1 penny to an oligarch as to keep it for now.”

Asset managers are also struggling to leave Russia, many of whom manage money on behalf of company and local government pension plans.

Many funds with high exposure to Russia were frozen shortly after the invasion, after Russia suspended its stock market. Read more

Last week, Luxembourg’s main financial center said two-thirds of those funds were frozen. Read more

The situation could become a little easier after April 1, when non-residents will again be able to sell shares on the Moscow Stock Exchange, although the capital controls that Moscow has introduced in retaliation for Western sanctions mean that it will be difficult to repatriate profits. Read more

In addition to defined benefit schemes, £500 billion is invested in defined contribution schemes, where members build up a pool to spend on their retirement.

The Association of Lifetime Pensions and Savings reports that about a third of all pension schemes have less than 0.1% of their assets in Russia, although overall the figure is “less than 0.5%” among the funds the trade body has checked with, according to PLSA director of policy and advocacy Nigel People.

Major pension funds such as West Yorkshire Local Authority, Railways Pension Scheme, BBC and NatWest (NWG.L) have 0.1% or less of their investments in Russia.

Some funds have set out public positions on how they will treat Russian investments, such as HSBC Bank Pension Trust (HSBA.L), which said Russian-domiciled assets accounted for 0.01% of assets.

The program said it would no longer buy any and would seek to divest existing ones if necessary.

UK Finance Minister Rishi Sunak has called on owners of assets such as pension funds to cut Russian investment. Read more

Richard Farr, chief executive of pensions consultancy Cardano Advisory, said clients were also considering restricting indirect investments in Russia, with some considering “do not buy” policies for companies with operations in Russia.

TPR has warned in recent guidance, however, that pension funds have a fiduciary duty to their members – to do the best they can for them financially.

If pension funds sell their Russian assets as fast as they can, it will likely be for little or nothing. But if they hold onto them in the hope that the assets will appreciate in value as the dispute is resolved, they may violate their own ethical guidelines.

“It’s a tough decision,” Farr said.

Editing by Toby Chopra

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