Pensions - Articles - Should pension schemes have invested in Woodford

This is a difficult situation for investors in the fund and sadly reflects the nature of the tail risks that equity market investors can be exposed to.

 By Simeon Willis, CIO, XPS Pensions Group
 However, it should not come as a surprise to a well advised pension scheme that suspension on a fund like this is a possibility. The fund prospectus would have clear statements of the level of permitted private and illiquid assets, which a professional adviser would have read and understood before recommending to a scheme. Individual retail investors on the other hand are unlikely to have been aware.
 But potential for illiquidity in itself isn’t necessarily a reason not to invest. Most pension schemes have scope to invest in assets that could suffer from a period of suspended trading and there can be an expected additional return from taking the illiquidity risk. Even a very mature pension scheme with negative cashflow is unlikely to need to spend more than 5% of its portfolio in a year to pay pensions.
 That said, the potential for loss of value in the fire sale is very real. No one wants to be in a fund holding market-moving sized positions where everyone else is leaving. Suspending a fund is making the best of a bad situation, and is key to treating clients fairly, but in some situations treating clients fairly means all clients taking their share of the losses.
 The best way of avoiding this issue is to ensure that a fund does not permit more frequent trading than can be met from selling a full cross section of the underlying assets. A mismatch here can lead to the equivalent of a run on a bank. Following the experience of the global financial crisis, practices have improved in this respect but there is still some way to go across the industry.

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