Barclays recent admission that it deliberately attempted to fix LIBOR rates has wider investment implications for pension scheme trustees.
John Broome Saunders, Actuarial Director at BROADSTONE, said “Within all asset classes, we have become used to placing complete trust in indices, either for benchmarking manager performance, or as the basis for index-tracking funds. Last week’s revelations about LIBOR are a cursory reminder that no index can be a perfect measure of “the market” and that many indices include subjective elements, or have been constructed using arbitrary principles that do not necessary have objective justification. Trustees must bear these potential failings in mind, rather than slavishly placing their faith in the sanctity of any specific index.”
Broome Saunders continues with an example “Corporate bond indices, like LIBOR, are not based on prices of actual trades, but are based on subjective estimates of bond values provided by investment banks and other market participants. Who knows whether such subjective valuations could be influenced by other factors. Any systematic manipulation of corporate bond indices could have significant implications for assessing balance sheet pension liabilities, given that they are used to derive discount rates under most major accounting standards.”
John Broome Saunders