LIBOR Rate Settlement and Assessing Impact on Pension Funds
Some suggest that the fallout related to a recent settlement about LIBOR rate setting is just the beginning of a spate of questions about what it all means. According to "LIBOR scandal could hit pension funds depending on derivatives trades" (July 4, 2012), Investment & Pensions Europe reporter Cecile Sourbes describes the kind of information that has to be vetted.
She adds that any gain or harm due to possible mis-pricing will largely depend on whether a pension plan has used derivatives and/or has invested in an instrument that is priced off the London Interbank Offered Rate (also known as "LIBOR"). As her article correctly adds, the economic cost (or benefit) to a plan sponsor will likewise be a function of its directional exposure at given points in time which in turn will depend on the nature of the investment and/or hedging strategy (assuming that a derivative instrument was used to hedge).
To illustrate, consider a plan that entered into an interest rate swap where it received a variable cash flow tied to LIBOR. A quantification of the impact on that pension fund would necessarily have to take into account the difference between the actual rate used to determine the periodic cash flow and the alleged "correct rate," adjusting for day count and deal size, among other factors.
For those pension plans that allocated money to asset managers who in turn deployed derivatives and/or financial instruments with a link to LIBOR, there will likely be questions about the fees paid for investment performance.
It is no surprise that the article concludes with a prediction that pension funds are likely to commence litigation as a result of the recent news about how LIBOR rates were set in the mid 2000's. Indeed, lawsuits have already been filed against some banks.
It is pretty clear to this blogger, Dr. Susan Mangiero, how the math should proceed and the kind of analyses that could be done. This assumes that the resolution of a dispute would require an estimate of "but if" damages (which is not a given and depends on the outcome of a judicial review and assessment of facts).