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Nearly 100,000 Standard Life investors have been told that a cash fund which many regarded as an ultra-safe alternative to the stockmarket was in reality invested in toxic mortgage debt that has plummeted in value.
The £2.4bn Standard Life Pension Sterling fund was the company's sole offering to pension investors who wanted to shelter their savings from market turmoil. But the company is writing to the fund's 97,000 investors warning them their average £19,100 deposit will be cut to £18,200 as a result of losses on mortgage-backed securities held in the fund.
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The news will dismay many investors who thought they were protected from stockmarket falls. Many were close to retirement and had parked their pension savings into the cash fund before turning it into an annuity.
Savers at other pension companies will also be shocked to discover that what they thought were deposit-style funds have fallen in value. Worst hit is Threadneedle's £450m money market fund, which has fallen 16.6% over the past year.
Threadneedle blames the unprecedented fall on the fund's holdings of floating rate notes (FRNs) which have fallen in value, with many unable to be converted into cash.
Prudential's Cash Haven fund has fallen by 0.3% over the year. It too was invested in FRNs.
Standard Life's Pension Sterling fund was 44% invested in asset-backed securities, considered at the time of purchase to be a triple-A rated alternative to cash. Only 12% is in cash itself.
The fund's biggest single investment is Lanark Master Issuer, a £3bn pool of Clydesdale and Yorkshire Bank mortgages, including buy-to-let loans. Its second-largest holding is Brunel RMS, a pool of "non-conforming" mortgages understood to be 28% "self-cert" and 44% buy-to-let loans, rated Aaa at issue.
A Standard Life spokesman said: "We have been very clear that the fund was not just invested in deposits but also in floating rate notes and asset-backed securities.
"We have had problems valuing the mortgage-backed securities in the fund. It came to light at the end of December that we couldn't put a value on them. We put that right on 14 January , which led to the fall in the fund's value."
He said that Standard Life may be forced to make further cuts to the fund's value if market turmoil persists. "It is impossible to predict with certainty when markets will improve and there may be a possibility of further deterioration."
Standard Life said it does not believe there is a case for compensation. But it promised to reimburse some savers who put in money between 23 December 2008 and 13 January 2009.
Financial advisers said they were outraged at the cut in values. Tom McPhail, pension specialist at Hargreaves Lansdown, said: "A lot of money market funds have tried to earn that little bit extra by pushing the boat out into asset-backed securities. But they just got the balance wrong. It is inexcusable.
"It's true that Standard Life did not say it was guaranteed. But on the other hand, they were marketing it as a secure, safe- haven fund for savers who were worried about equity markets."
Standard Life has since opened a new cash fund for investors nervous about markets. The Managed Cash Fund is designed to produce lower levels of volatility and investment returns, before charges, that are closely aligned to deposit rates.
Pension risks
Cash funds are used as safe haven vehicles, usually by pension savers. Many "park" their pension savings in a cash fund just before retirement. There are two types - deposit-style funds, which are virtually risk free, and funds which try to enhance returns using floating rate notes and asset-backed securities. Until now, that strategy worked, but while there is no market in such securities, it's difficult to put a value on such funds. Few workers in company pension schemes will know if their "cash" option is risky. They can check on websites such as trustnet.co.uk for performance figures. Better still, trustees of company schemes should ensure their cash option is safe.
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