Source: National Institute of Economic and Social Research

The above chart compares the current recession in U.K. to past economic slumps.

In the U.S., the pension plans of state and local governments have a large portion of their assets in equities. Due to this high exposure to equities, the plans suffered severe losses as the markets fell hard until March this year.

The average asset allocation of U.S. Define Benefit (DB) plan has 60% in equities, 30% fixed income and 10% in other assets.

“Public pension plans of U.S. State and local authorities also suffered severe losses due to high equity exposure and substantial leverage. The financial crisis has reduced the value of equities in State and local authorities’ DB plans by about US$1 trillion. These changes will become evident over time because State and local authority plans smooth both gains and losses by averaging the market value of assets over a five year period. However, they will be large as public plans in the United States have on average 60 percent of assets in equities. In addition, they leveraged themselves to fund liabilities. In general, state and local plans had an average funding ratio of 87 percent in 2007 which, by October 2008 would have declined to 65 percent if assets were valued at market values (Munnell et al. (2008)) (the impact of smoothing is shown in Figure 13. In the optimistic scenario that assets level return to the 2007 values, funding ratios are projected to increase to 75 percent in 2013. Under the pessimistic scenario that asset values remain at the level of end 2008, funding ratios are expected to further decrease to 59 percent. In both scenarios, liabilities are assumed to grow at 5.7 percent per year.”

Source: How the Financial Crisis Affects Pensions and Insurance and Why the Impacts Matter by
Gregorio Impavido and Ian Tower, IMF Working Paper

To download the full paper, click Pension-Plan-Impact-Crisis

Today the Office for National Statistics announced that GDP shrank at a rate of 0.8% between in the second quarter. This is higher than the 0.3% economists had predicted.The GDP has contracted for the fifth consecutive quarter and is approaching the levels of 1980s recession.

On July 16th, IMF released the Staff Report for UK. The following is a summary of some of the key points from the report:

• The UK economy was hit hard in this crisis because of the large size of its financial sector
• The outlook is highly uncertain and deleveraging  of financial institutions and households’ balance sheets is needed
• The unemployment rate is projected to be 7.6% in 2009 and 9.2% in 2010
• Dramatic deterioration in public finances with the net public sector debt expected to reach 67.9% of GDP next year and double in the next five years
• Though British banks reported record write-downs in 2008, substantial further write-downs are expected this year and next
• Housing sector collapse is still not complete despite the foreclosure rate was only 0.35% compared to 4.25% in the U.S.
• Since the five largest British owned banks have significant international operations, their recovery is strongly related to the economies the U.S. , Western Europe and some Asian countries

Source: IMF

• The economic recovery is projected to be gradual